Mercury Corporation manufactures car audio systems. It is a division of Country-Wide Motors, which manufactures vehicles. Mercury sells car audio systems to other divisions of Country-Wide, as well as to other vehicle manufacturers and retail stores. The following information is available for Mercury’s standard unit: variable cost per unit $31, fi xed cost per unit $23, and selling price to outside customer $85. Country-Wide 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 Country-Wide has ordered Mercury to provide 200,000 units per year at a transfer price of $30 per unit. Mercury is already operating at full capacity. Mercury can avoid $2 per unit of variable selling costs by selling the unit internally.

Instructions

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

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

(c) How should the company resolve this situation?