Knopfler Industries, Inc. is a diversified aerospace company, including two operating divisions, Specialized Semiconductors and Navigational Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

The Specialized Semiconductors Division is presently producing 1,600 units out of a total capacity of 2,000 units. Materials used in producing the Navigational Systems Division's product are currently purchased from outside suppliers at a price of $825 per unit. The Specialized Semiconductors Division is able to produce the components used by the Navigational Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.Instructions1. Would the market price of $825 per unit be an appropriate transfer price for Knopfler Industries, Inc.? Explain.2. If the Navigational Systems Division purchases 400 units from the Specialized Semiconductors Division, rather than externally, at a negotiated transfer price of $625 per unit, how much would the income from operations of each division and total company income from operations increase?3. Prepare condensed divisional income statements for Knopfler Industries, Inc., based on the data in part (2).4. If a transfer price of $700 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase?5. a. What is the range of possible negotiated transfer prices that would be acceptable for Knopfler Industries, Inc.?b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transferprice?

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Knopfler Industries, Inc. Divisional Income Statements For the Year Ended December 31, 2010 Specialized Semi-conductors Division Navigational Systems Division Total Sales: 1,600 units $ 825 per unit 2,500 units @ S1,240 per unit $1,320,000 $1,320,000 3100,000 $4,420,000 $3.100,000 $1,320,000 $3,100,000 Expenses: Variable: 1,600 units @ 5485 per unit 2,500 units @ $975 per unit Fixed S 776,000 $ 776,000 $2437,500 2,437,500 488,000 636,000 1,124,000 Total expenses Income from operations $1,264,000 $3.073,500 $4,337,500 $ 56,000 $ 26,500 $ 82,500 *S825 of the $975 per unit represents materials costs, and the remaining S150 per unit represents other variable con- version expenses incurred within the Navigational Systerms Division.