Refer to the financial data presented in Self-Study Problem 1. The financial statements represent the operations of your division dur- ing the past 12 months. Assume that you are a divisional manager who purchases raw materials from other divisions within the company. Your company has a market-based transfer pricing policy. Thus, managers commonly seek transfer prices consistent with bids submitted by outside companies. Before entering into price negotiations to purchase raw materials from the man- ager of Division B, you wish to understand Division B's cost structure and other fac- tors that may affect the negotiations.

Required Respond to the following questions. A. You estimate that 25% of the materials used by your division was purchased from Division B. Assuming that your division's total cost of materials was $40,000,000, what was the cost of materials purchased from Division B? B. If the selling division (Division B) typically earns a 20% gross margin [(sales-cost of goods sold) sales], what was Division B's cost of goods sold? C. You recall from past meetings that Division B is very capital intensive (they use ex- pensive equipment, whose costs are fixed in the short run). Their variable costs are 30% of total manufacturing costs, while fixed costs make up the remaining 70%. Using the transfer pricing equation, transfer price = variable cost + opportunity cost, calculate the minimum acceptable transfer price (from the seller's perspec- tive). Assume that Division B is operating at full capacity. D. Should the manager of Division B consider negotiating a lower transfer price if the division is not operating at capacity? Explain.