A transportation equipment manufacturer, Chalmers Corporation, is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal or external customers. Division P has always acquired a certain equipment component from Division S. However, when informed that Division S was increasing U unit price to $220, Division P's management decided to purchase the component from outside suppliers at a price of $200. Division S had recently acquired some specialized equipment that was used primarily to make this component. The manager cited the resulting high deprecation charges as the justification for the price boost. He asked the president of the company to instruct Division P to buy from S at the $220 price. He supplied the following: P's annual purchases of component 2,000 units S's variable costs per unit $190 S's fixed costs per unit $ 20 a. Suppose that there are no alternative uses of S facilities. Will the company as a whole benefit if P buys from the outside suppliers for $200 per unit? Show computations to support your answer. b. Suppose that internal facilities of S would not otherwise be idle. The equipment and other facilities would be assigned to other production operations that would otherwise require an additional annual outlay of $29,000. Should P purchase from outsiders at $200 per unit? c. Suppose that there are no alternative uses for S's internal facilities and that the selling price of outsiders drops $15. Should P purchase from outsiders? d. What is the general transfer pricing rule?
