Allocation of Central Corporate Office Costs. Horton Company has several operating divisions which are largely autonomous as far as decision making is concerned. The central corporate office consists mainly of the president and immediate staff. The annual fixed costs are \(\$ 1,000,000\). In calculating division profit, these costs are allocated to divisions on the basis of sales. The current allocation rate is \(\$ 0.04\) per sales dollar based on the company-wide normal sales volume of \(\$ 25,000,000\) per year. Harold Wolf, the company controller, does not consider this to be a transfer price because he feels that the divisions are not really buying anything. In Wolf's view, the charge is a method of allocating costs which should be absorbed by the divisions when they calculate their annual net income.

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Do you agree with Mr. Wolf? In what sense is the charge a transfer price? Could the charge affect the decision of a division manager considering a new product with a variable cost of \(\$ 5.50\) and a selling price of \(\$ 8\) ? Explain.