Airflow Inc. produces ceiling fans for home and industrial use. The parts for the different styles of fans are produced and sold by the Parts Division to the Assembly Division of Airflow Inc. The cost to the arts Division is $12 per fan. The Assembly Division assembles the purchased parts into finished fans at a cost of $6 per unit and sells the assembled product to an outside wholesaler for $25 per unit. Due to the proprietary technology used to make the Airflow fans operate particularly quietly, the Parts Division is not allowed to sell the parts it produces to external customers. Both divisions have some idle capacity. The managers of both divisions are evaluated based on the profitability of their divisions.

Required:

1. What is the profit per unit of the two divisions if the transfer price is $15 per unit?

2. What is the profit per unit of the two divisions if the transfer price is $12 per unit?

3. If the Parts Division operates inefficiently, causing the cost of the parts to rise to $13 per unit, and that cost is used as the transfer price, what is the profit of the two divisions?

4. Take on the role of the Assembly Division manager and evaluate the answer in (3) above. Would you agree or disagree with the $13 transfer price? Why?

5. Which transfer price is best from the point of view of the company as a whole? Why?