Dolby Ukes makes various types of ukeleles. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Alto Division has offered the Peg Division $0.26 per peg to supply it with 200,000 pegs. It has been purchasing these pegs for $0.28 per unit from outside suppliers. The Peg Division receives $0.30 per unit for sales made to outside customers on this type of peg. The variable cost of pegs sold externally by the Peg Division is $0.18. It estimates that it will save $0.04 per peg of sell- ing expenses on units sold internally to the Alto Division. The Peg Division has no excess capacity.
Instructions
(a) Calculate the minimum transfer price that the Peg Division should accept. Discuss whether it is in the Peg Division's best interest to accept the offer.
(b) Suppose that the Peg Division decides to reject the offer. What are the financial impli- cations for each division, and for the company as a whole, of this decision?