Problem: Division A of Hoover Inc. transfers its product to Division B. Division B can either buy the item internally or externally (cost = $75 each). Division A has just completed its annual cost update as follows:
Direct material $25.00
Direct labor 18.75
Variable manufacturing overhead 6.25
Fixed manufacturing overhead 5.00
Variable selling expenses 3.75
Fixed selling and administrative expenses 7.50
Total costs $66.25
Desired return 13.75
Sales price $80.00
Division A is operating at 80 percent of its 500,000 unit capacity.
Required to do:
1.) What is the minimum transfer price Division A should charge for internal transfers?
2.) What is the maximum price Division B would be willing to pay?
3.) Why should Division A reduce its price to Division B?