Carnover, Inc., manufactures a broad line of industrial and consumer products. One of its plants is located in Madrid, Spain, and another in Singapore. The Madrid plant is operating at 85 percent capacity. Its main product, electric motors, has experienced softness in the market, which has led to predictions of further softening of the market and predictions of a decline in production to 65 percent capacity. If that happens, workers will have to be laid off and one wing of the factory closed. The Singapore plant manufactures heavy-duty industrial mixers that use the motors manufactured by the Madrid plant as an integral component. Demand for the mixers is strong. Price and cost information for the mixers are as follows:

Fixed overhead is based on budgeted fixed overhead of $2,000,000.

Required:

1. What is the maximum transfer price the Singapore plant would accept?

2. What is the minimum transfer price the Madrid plant would accept?

3. Consider the following environmental factors:

How might these environmental factors impact the transfer pricing decision?

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Price $2,200 Direct materials 630 Direct labor 125 Variable overhead 250 Fixed overhead 100 Fixed overhead is based on an annual budgeted amount of $3,500,000 and budgeted production of 35,000 mixers. The direct materials cost includes the cost of the motor at $200 (market price). The Madrid plant capacity is 20,000 motors per year. Cost data are as follows: Direct materials $ 75 Direct labor 60 Variable overhead 60 Fixed overhead 100