Travel Well, Inc., manufactures a variety of luggage for airline passengers. The company has several luggage production divisions as well as a wholly owned subsidiary, SecureLock, that manufactures small padlocks used on luggage. Each piece of luggage that Duffle Bag Division produces has two padlocks for which it previously paid the going market price of $3 each. Financial information for Travel Well’s Duffle Bag Division and for SecureLock follow:

SecureLock has a production capacity of 250,000 locks.

Required:

1. Determine how much Travel Well will save on each padlock if the Duffle Bag Division obtains them from SecureLock instead of an external supplier.

2. Determine the maximum and minimum transfer prices for the padlocks. Who sets these?

3. Suppose Travel Well has set a transfer price policy of variable cost plus 50 percent for all related-party transactions. Determine how much each party will benefit from the internal transfer.

4. Determine the mutually beneficial transfer price.

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Sales 4,500 bags x $150 each 200,000 locks x $3.00 each Duffle Bag Division SecureLock $675,000 $600,000 Variable expenses 4,500 bags x $85.00 each 382,500 200,000 locks x $0.60 each 120,000