Loud Play Corporation manufactures car stereos. It is a division of Rust Bucket Motors, which manufactures vehicles. Loud Play sells car stereos to Rust Bucket, as well as to other vehicle manufacturers and retail stores. The following information is avail- able for Loud Play's standard unit: variable cost per unit $35; fixed cost per unit $25; and selling price to outside customer \($85\). RustBucket currently purchases a standard unit from an outside supplier for \($80\). Because of quality concerns and to ensure a reliable supply, the top management of Rust Bucket has ordered Loud Play to provide 200,000 units per year at a transfer price of \($35\) per unit. Lond Play is already operating at full capacity Loud Play can avoid \($3\) per unit of variable selling costs by selling the unit internally.

Instructions

Answer each of the following questions.

(a) What is the minimum transfer price that Loud Play should accept?

(b) What is the potential loss to the corporation as a whole resulting from this forced transfer?

(c) How should this situation be resolved?