Gardner Electronics Corporation makes a Wi-Fi receiver that it sells to retail stores for $75 each. The variable cost to produce a receiver is $35 each; the total fixed cost is $5,000,000. Gardner is operating at 80 percent of capacity and is producing 200,000 receivers annually. Gardner's parent company, Sterling Corporation, notified Gardner's president that another subsidiary company, Newport Technologies, has begun making home theater systems and can use Gardner's receiver as a part. Newport needs 40,000 receivers annually and is able to acquire similar receivers in the market for $72 each.
Under instructions from the parent company, the presidents of Gardner and Newport meet to negotiate a price for the receiver. Gardner insists that its market price is $75 each and will stand firm on that price. Newport, on the other hand, wonders why it should even talk to Gardner when Newport can get receivers at a lower price.
Required
a. What transfer price would you recommend?
b. Discuss the effect of the intercompany sales on each president's return on investment.
c. Should Gardner be required to use more than excess capacity to provide receivers to Newport if Newport's demand increases to 60,000 receivers? In other words, should it sell some of the 200,000 receivers that it currently sells to unrelated companies to Newport instead? Why or why not?