Transfer pricing and fixed cost per unit The Murdock Division of Yesso Company currently produces electric fans that desktop computer manufacturers use as cooling components. The Hart Division, which makes laptop computers, has asked the Murdock Division to design and supply 20,000 fans per year for its laptop computers. Hart currently purchases laptop fans from an outside vendor at the price of $18 each. However, Hart is not happy with the vendor’s unstable delivery pattern. To accept Hart’s order, Murdock would have to purchase additional equipment and modify its plant layout. The additional equipment would enable the company to add 35,000 laptop fans to its annual production. Murdock’s avoidable cost of making 20,000 laptop fans follows:

Required

a. What would be the financial consequence to Yesso Company if the Murdock Division makes the laptop fans and sells them to the Hart Division? What range of transfer prices would increase the financial performance of both divisions?

b. Suppose the Hart Division increases production so that it could use 35,000 Murdock Division laptop fans. How would the change in volume affect the range of transfer prices that would financially benefit both divisions?