Morgan Chemical is a cleaning-supplies manufacturing company. Morgan has two main divisions of product types: Base Chemicals (used to create other products-frequently sold to other companies) and Commercial Brands (sold to consumers). The Commercial Brands division has the option to purchase the needed ingredients from the Base Chemicals department or to choose an outside supplier (depending on the agreed-upon transfer price).
Extra demand for the following month is projected to be 500 gallons of Commercial Brands Chemicals. However, the Base Chemicals department is already producing at full capacity: to meet this demand, the Base Chemicals department would need to shift production from current projects, and management estimates that $100,000 in contribution margin would be lost as a result. The following are the expected costs for the extra production in the Base Chemicals department:
An outside supplier has offered to produce the needed ingredients for $460/gallon.
Should the Commercial Brands department purchase the chemicals from the Base Chemicals department or from the outside supplier?

Question

Morgan Chemical is a cleaning-supplies manufacturing company. Morgan has two main divisions of product types: Base Chemicals (used to create other products-frequently sold to other companies) and Commercial Brands (sold to consumers). The Commercial Brands division has the option to purchase the needed ingredients from the Base Chemicals department or to choose an outside supplier (depending on the agreed-upon transfer price). 
Extra demand for the following month is projected to be 500 gallons of Commercial Brands Chemicals. However, the Base Chemicals department is already producing at full capacity: to meet this demand, the Base Chemicals department would need to shift production from current projects, and management estimates that $100,000 in contribution margin would be lost as a result. The following are the expected costs for the extra production in the Base Chemicals department:
  An outside supplier has offered to produce the needed ingredients for $460/gallon.
Should the Commercial Brands department purchase the chemicals from the Base Chemicals department or from the outside supplier?

Quizplus · Accepted Answer

The Answer of Morgan Chemical is a cleaning-supplies manufacturing company. Morgan has two main divisions of product types: Base Chemicals (used to create other products-frequently sold to other companies) and Commercial Brands (sold to consumers). The Commercial Brands division has the option to purchase the needed ingredients from the Base Chemicals department or to choose an outside supplier (depending on the agreed-upon transfer price). 
Extra demand for the following month is projected to be 500 gallons of Commercial Brands Chemicals. However, the Base Chemicals department is already producing at full capacity: to meet this demand, the Base Chemicals department would need to shift production from current projects, and management estimates that $100,000 in contribution margin would be lost as a result. The following are the expected costs for the extra production in the Base Chemicals department:
  An outside supplier has offered to produce the needed ingredients for $460/gallon.
Should the Commercial Brands department purchase the chemicals from the Base Chemicals department or from the outside supplier?

Morgan Chemical Is a Cleaning-Supplies Manufacturing Company