Ace Division of Randall Corporation produces electric motors, 20% of which are sold to Deuce Division of Randall and the remainder to outside customers. The company treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Company policy requires that all interdivisional sales and purchases be recorded at a transfer price equal to variable cost. Ace Division's estimated sales and standard cost data for the year, based on full capacity of 100,000 units, follow:

Ace Division has an opportunity to sell to an outside customer the 20,000 units now committed to Deuce Division. The sale price would be $75 per unit during the current year. Deuce Division could purchase its requirements from an outside supplier at a price of $85 per unit.
Required:
(1) Assuming that Ace Division desires to maximize its gross profit, should it take on the new customer and discontinue its sales to Deuce Division? Support your answer by computing the increase or decrease in Ace Division's gross profit.
(2) Assume instead that Randall Corporation permits division managers to negotiate the transfer price. The managers agree on a tentative transfer price of $75 per unit, to be reduced based on an equal sharing of the additional gross profit to Ace Division resulting from the sale to Deuce of 20,000 motors at $75 per unit. What is the actual transfer price?

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Deuce Outsiders $900,000 $8,000,000 (900,000 (3,600,000) (300,000) 1200,000) $(300,000) 3,200,000 80,000 Sales Gross profit.. 20,000