Selecting a Transfer Price. Division 1 produces 100,000 units of a product with a variable cost of \(\$ 5\) per unit and a fixed cost of \(\$ 3\) per unit (based on \(\$ 300,000\) allocated to 100,000 units). These units can be sold in an intermediate market for \(\$ 1,000,000\) ( \(\$ 10\) per unit) or transferred to Division 2 for additional processing to be sold in a finished market. The selling price of the fully processed units is \(\$ 14\) per unit, and the additional processing cost in Division 2 is \(\$ 1.50\) per unit. The fixed costs in Division 2 total \(\$ 100,000\). At this time, excess capacity exists in Division 2 if the units are not transferred.

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Should the 100,000 units be sold by Division 1 or processed further and sold by Division 2? Would a transfer price based on either market price or variable cost be likely to lead to the right decision? Explain.