A Corporation has 2 divisions: Division 1 and Division 2. Division 1 makes product A, product B and product C. Those products are sold to both to outside customers and to Division 2. Division 2 uses products A,B, and C in manufacturing products D, E and F respectively. Recently products a A,B, and C have been in short supply. As a result, Division 2 has been operating below capacity because of the lack of these products. Finally, Division 1 was told to sell all its products to Division 2. Here the facts about this products:
Division 1:
product A Product B Product C
transfer price $10 $10 $15
variable manufacturing cost $3 $6 $5
contribution per unit $7 $4 $10
fixed cost (total) $50,000 $100,000 $75,000
Division 1 has a capacity of 50,000 units per month. The processing constraints are such that capacity production can be obtained only by producing at least 10,000 units of each products. The remaining capacity can be used to produce 20,000 units of any combination of the three products. The Division 1 cannot exceed the capacity of 50,000 units.
Division 2 has sufficient capacity to produce about 40% more than it is now producing because the availability of products A,B, and C is limiting production. Also, Division 2 can sell all the products that it can produce at the prices indicated above.
Division 2
product D Product E Product F
selling price $28 $30 $30
variable cost:
inside purchases 10 10 15
other variable costs 5 5 8
total variable cost 15 15 23
contribution per unit 13 15 7
fixed cost (total) $100,000 $100,000 $200,000
Question:
What production pattern optimizes total company profits?