Division A makes 100 units of a product for a fixed cost of $200 and a variable cost of $5 per unit. Division B of the same company purchases the product from Division A. It odds $3 per unit and sells the product to an outside buyer for $9 per unit. There is no other buyer for the intermediate product and the fixed cost is sunk.
What happens if the full cost is used as the transfer price? What happens if the variable cost is used as the transfer price?