Transfer Pricing The Plastics Company has a separate division that produces a special molding powder. For the past three years about two-thirds of the output has been sold to another division within the company. The remainder has been sold to outsiders. Last year’s operating data follow:

TO OTHER DIVISION TO OUTSIDERS Sales 10,000 T. @ $70* $700,000 5,000 T. @ $100 $500,000 Variable costs @ $50 $500,000 $250,000 Fixed costs 150,000 75,000 Total costs $650,000 $325,000 Gross margin $ 50,000 $175,000 “The $70 price is ordinarily determined by the outside sales price less selling and administrative expenses wholly applicable to outside business.
The buying-division manager has a chance to get a firm contract with an outside supplier at $65 for the ensuing year.
Assume that the molding-powder division manager says that he cannot sell at $65, because no margin can be earned. As the buying-division manager, write a short reply. Assume that the 10,000 tons cannot be sold by the moldingpowder division to other customers. lop1