Quail Company produces outdoor gear. Salter is a division of Quail that manufactures unbreakable zippers used in Quail’s gear and sold to other manufacturers. Cost information per zipper follows:

Variable cost .......$1.60

Full cost ......... 2.20

Market price ...... 5.00

In addition, Salter’s capacity data follow:

Capacity per year .......2,000,000 zippers

Current production level ...1,500,000 zippers

Required:

1. Assuming Quail produces 300,000 sleeping bags per year, what is the overall benefit of using zippers from Salter instead of purchasing them externally?

2. Determine the maximum price that the sleeping bag production facility would be willing to pay to purchase the zippers from Salter. How is the overall benefit divided between the two divisions if this transfer price is used?

3. Determine the minimum that Salter will accept as a transfer price. How is the overall benefit divided between the two divisions if this transfer price is used?

4. Determine the mutually beneficial transfer price for the zippers.

5. How would your answer change if Salter were currently operating at capacity?