Internal Pricing Decision. Alan William is the manager of the Sterling Division of Triple-A Machine Company. This division manufactures spring assemblies that are sold to various outside customers at a price of \(\$ 32\) per unit. Recently, the division has been operating at 550,000 machine hours. Normal capacity has been defined as 700,000 machine hours and is approximately equal to the practical capacity.

Each assembly requires 15 minutes of machine time. The direct materials and direst labor cost per assembly is \(\$ 16.20\), and overhead varies at the rate of \(\$ 8.40\) per machine hour. The total fixed overhead for the year is \(\$ 3,521,000\).

William's division has just been awarded a contract for the sale of 400,000 units in another country at a unit price of \(\$ 26\). This contract will not interfere with the regular sales at a price of \(\$ 32\), and it is anticipated that this contract can be renewed in future years.

The Jessop Division of the company has started production of a product line that will require 400,000 units of the spring assembly made by the Sterling Division. The president of Triple-A states that the assemblies should be transferred between the divisions at the variable cost to the Sterling Division. If Sterling Division does not furnish the units, the Jessop Division will be forced to purchase the assemblies on the outside market at \(\$ 32\) apiece. With higher costs, Jessop will have lower profits on the sale of the end products.

\section*{Required:}

1. Determine the variable cost to produce each spring assembly.

2. Under the circumstances, should the Sterling Division supply the Jessop Division? Explain.

3. What price should be used for the internal transfer, assuming a transfer should be made?