The Assembly Division of Office Furniture, Inc. needs 1,200 units of a subassembly from the Fabricating Division. The company has a policy of negotiated transfer prices. The Fabricating Division has enough excess capacity to produce 2,000 units of the subassembly. Its variable cost of production is $20. The market price of the subassembly is $50.
What is the natural bargaining range for a transfer price between the two divisions? Explain why no price below your range would be acceptable. Also explain why no price above your range would be acceptable.