Graham Motors manufactures specialty tractors. It has two divisions: a Treactor Division and a Tire Division. The Tractor Division can use the tires produced by the Tire Division. The market price per tire is $75. The Tire Division has the following costs per tire:
Direct material cost per tire: $15
Conversion costs per tire: $3 (Assume the $3 includes only the variable portion of conversion costs.)
Fixed manufacturing overhead cost for the year is expected to total $116,000. The Tire Division expects to manufacture 58,000 tires this year. The fixed manufacturing overhead per tire is $2 ($116,000 divided by 58,000 tires).
Part 1:
Assume that the Tire Division has excess capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Graham Motors has a negotiated transfer price policy, what is the lowest acceptable transfer price? What is the highest acceptable transfer price?
• The lowest acceptable transfer price is $_______, the Tire Division's ______________.
• The highest acceptable transfer price is $_______, the Tire Division's _____________.