Now suppose that the Western Division has an opportunity to…
Now suppose that the Western Division has an opportunity to use its excess capacity to produce 15,000 headbands. If it makes these, then it cannot make any socks for the Eastern Division without giving up some of its (highly profitable) external sock business. Western’s incremental (variable) cost of producing and selling headbands is $3.65 per unit, and they are sold to external customers for $5.25 per unit. If the transfer price for socks remains at $4.00, then which product will the Western Division want to make in order to maximize its own profit?