Family Inc. has two divisions. Division A makes and sells T-shirts. Division B manufactures and sells ties. Each T-shirt has a tie as one of its components. Division A needs 10,000 ties for the coming year and can purchase ties at a cost of $30 from an outside vendor. Division B has the capacity to manufacture 50,000 ties annually. Sales to outside customers are estimated at 40,000 ties for the next year. It sells ties for $35 each. Variable costs are $29 per tie and include $2 of variable sales costs that are not incurred if division B sells ties internally to division A. The total amount of fixed costs for division B is $80,000.
Instructions
Consider the following independent situations:
(a) What should be the minimum transfer price division B accepts for the 10,000 ties and the maximum transfer price division A pays? Justify your answer.
(b) Suppose division B could use the excess capacity to produce and sell externally 20,000 units of a new product at a price of $18 per unit. The variable cost for this new product is $15 per unit. What should be the minimum transfer price division B accepts for the 10,000 ties and the maximum transfer price division A pays? Justify your answer.
(c) If division A needs 15,000 ties instead of 10,000 during the next year, what should be the minimum transfer price division B accepts and the maximum transfer price division A pays? Justify your answer.