P8-5A Gutierrez Company makes various electronic products. 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 Board Division has offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per unit from outside suppliers. The Chip Division receives $22.50 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity.
(a) Calculate the minimum transfer price that the Chip Division should accept. Discuss whether it is in the Chip Division’s best interest to accept the offer.
(b) Suppose that the Chip Division decides to reject the offer. What are the financial implications for each division, and for the company as a whole, of this decision?
Total loss to company $160,000