Transfer Price Decision. The Elkton Subsidiary of Nordic Instruments, Inc. manufactures small printed circuit boards and has the capacity to make 100,000 units of a given model each year. At the present time, only 75,000 units are being made each year and are sold to an outside customer for \(\$ 7.50\) a unit.

Fixed manufacturing costs are applied on the basis of an annual production of 100,000 units each year. Total fixed costs for the year are \(\$ 175,000\). The total unit

cost of each circuit board is \(\$ 6.50\). The Reeves Subsidiary has been purchasing this type of circuit board from an outside supplier at a price of \(\$ 7.50\) per unit. The president of Nordic requests that the Elkton Subsidiary deliver 25,000 circuit boards to the Reeves Subsidiary at a price equal to the variable cost.
The superintendent of Elkton states that the division gains no advantage by selling at variable cost. No contribution is made to the recovery of the fixed costs. Furthermore, the superintendent states that the company gains nothing. The fixed costs of Elkton must be recovered, and Reeves should pay the full price of \(\$ 7.50\) as it would by buying outside.
\section*{Required:}
1. Is the argument of the superintendent valid? Explain.
2. What is the variable cost of manufacturing each circuit board?
3. Describe a pricing system that should benefit the company and be acceptable to each division