Lyubov Inc. has a number of divisions, including the Grad division (a producer of liquid pumps), and Vtori division (a manufacturer of boat engines). Grad division produces the h20- model pump that can be used by Vtori division in the production of motors that regulate the raising and lowering of the boat engine's stern drive unit. The market price of the h20-model is $1,440, and the full cost of the h20-model is $1,080.
Required:
1. If Lyubov Inc. has a transfer pricing policy that requires transfer at full cost, what will the transfer price be? Do you suppose that Grad and Vtori divisions will choose to transfer at that price?
2. If Lyubov Inc. has a transfer pricing policy that requires transfer at market price, what would the transfer price be? Do you suppose that Grad and Vtori divisions would choose to transfer at that price?
3. Now suppose that Lyubov Inc. allows negotiated transfer pricing and that Grad division can avoid $240 of selling expense by selling to Vtori division. Which division sets the mini- mum transfer price, and what is it? Which division sets the maximum transfer price, and what is it? Do you suppose that Grad and Vtori divisions would choose to transfer some- where in the bargaining range?