(Transfer price) Miranda Company comprises the Engine Division and the Mobile Systems Division. The Engine Division produces engines used by both the Mobile Systems Division and a variety of external industrial cus¬ tomers. External sales orders are generally produced in 50-unit lots. Using this typical lot size, the cost per engine is as follows:

An engine’s external selling price is $5,232, providing the Engine Divi¬ sion with a normal profit margin of 20 percent. Because a significant num¬ ber of sales are being made internally, Engine Division managers have decided that the external selling price should be used to transfer all engines to Mobile Systems.
When the Mobile Systems Division manager learned of the new transfer price, she became very upset because it would have a major negative im¬ pact on her division’s profit figures. Mobile Systems has asked Engine Divi¬ sion to lower its transfer price so that it earns a profit margin of only 15 percent. Mobile Systems’ manager has asked corporate management whether the division can buy engines externally. Tom Hawkins, Miranda’s president, has gathered the following information on transfer prices to help the two divisional managers negotiate an equitable transfer price:

a. Discuss advantages and disadvantages of each of these transfer prices to both the selling and buying divisions and to Miranda Company.

b. If the Engine Division could sell all of its production externally at $5,232, what is the appropriate transfer price and why? LO.1

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Variable production cost Fixed manufacturing overhead $2,100 900 Variable selling expense 300 Fixed selling expense 420 Fixed administrative expense 640 Total unit cost $4,360