Northland Company makes bicycles.
Components are made in various divisions and transferred to the Western Division for assembly into final products. The Western Division can also buy components from external suppliers. The wheels are made in the Eastern Division, which also sells wheels to external customers. All divisions are profit centres and managers are free to negotiate transfer prices. Prices and costs for the Eastern and Western Divisions are

Fixed costs in both divisions will be unaffected by the transfer of wheels from the Eastern to the Western Division.
1. Compute the maximum transfer price per wheel the Western Division would be willing to pay to buy wheels from the Eastern Division.
2. Compute the minimum transfer price per wheel at which the Eastern Division would be willing to produce and sell wheels to the Western Division. Assume that Eastern has excess capacity. Compute the minimum transfer price per wheel if Eastern had no excess capacity.

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EASTERN DIVISION Sales price to external customers $14 Internal transfer price ? Costs: Variable costs per wheel $9 Total fixed costs $320,000 64,000 wheels* Budgeted production "Includes production for transfer to Western. WESTERN DIVISION Sales price to external customers Costs: Wheels, per bicycle Other components, per bicycle Other variable costs, per bicycle Total fixed costs Budgeted production $175 ? $90 $20 $640,000 16,000 bicycles