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Problem 9-5 of Kaplan-Transfer Pricing Dispute A transportation equipment manufacturer is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal and external customers. Division P has always acquired a certain equipment component from Division S. However, when informed that Division S was increasing its 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 depreciation 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 information: P's annual purchases of component 2,000 units S's unit and batch-related costs per unit $190 S's capacity related costs per unit $20 S's required return on investment $10 Suppose there are no alternative uses of the S facilities. Required 1) Will the company as a whole benefit if P buys from the outside suppliers for $200 per unit? 2) Suppose the selling price of outsiders drops another $15 to $185. Should P purchase from outsiders? 3) Suppose (disregarding Requirement 2) that S could modify the component at an additional variable cost of $10 per unit and sell the 2,000 units to other customers for $225. Would the entire company then benefit if P purchased the 2,000 components from outsiders at $200 per unit? 4) Suppose the internal facilities could be assigned to other production operations that would otherwise require additional annual outlays of $29,000. Should P purchase from outsiders at $200 per

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