35. Gallico has historically purchased all parts for its products (each unit requires two parts) from Roberts Corporation, and is considering acquiring Roberts in order to save money. As part of the acquisition, Gallico would agree to let the Parts division (Roberts Corporation) operate as independently as possible, and thus would allow the Parts division to negotiate a transfer price for the parts with the Manufacturing division. The Parts division would pay a tax rate of 25%, while the Manufacturing division would pay a tax rate of 30%. Information about the two potential divisions follows:

Includes $5 per unit in selling costs that could be avoided if the product is transferred internally.

a. What range will the negotiated price fall in?

b. What price from that range would Gallico most prefer?

c. Would it be worth it for Gallico to acquire Roberts? If so, what would the additional before-tax annual profit be, assuming that a transfer price can be negotiated between the two divisions?

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Parts Manufacturing Annual manufacturing capacity 100,000 20,000 Annual outside market demand Annual fixed costs 80,000 $1,300,000 35,000 $1,000,000 Variable cost per unit $20* $75 (plus parts) Market selling price $50 $250