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 AB and C in manufacturing products D E and F respectively. Recently products a AB 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) $50000 $100000 $75000
Division 1 has a capacity of 50000 units per month. The processing constraints are such that capacity production can be obtained only by producing at least
10000 units of each products. The remaining capacity can be used to produce 20000 units of any combination of the three products. The Division 1 cannot
exceed the capacity of 50000 units.
Division 2 has sufficient capacity to produce about 40% more than it is now producing because the availability of products AB and C is limiting production.
Also Division 2 can sell all the products that it can produce at the prices indicated above.
product D Product E Product F
selling price $28 $30 $30
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) $100000 $100000 $200000
What production pattern optimizes total company profits?