(1) calculate the acceptable lowest and highest transfer price when the Electrical Division is operating at its full capacity

(2) discuss whether the Electrical Division and the Brake Division could find an agreeable transfer price that would benefit the both divisions.

In your discussion, please explain why or why not the two divisions may come to an agreement, and suggest possible remedies for the disagreement.

CASE 1126 Transfer Pricing; Divisional Performance Q1L0113 Weller Industries is a decentralized organization with six divisions. The company's Electrical Division produces a Page 534 variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $7.50 each; the fitting has a variable manufacturing cost of $4.25. The company's Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $5 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows: Purchased parts (from outside vendors) $22.50 Electrical fitting X52 5.00 Other variable costs 14.00 Fixed overhead and administration 8.00 Total cost per brake unit $49.50 Although the $5 price for the XS2 fitting represents a substantial discount from the regular $7.50 price, the manager of the Brake Division believes the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard "through the grapevine" that the airplane manufacturer plans to reject his bid if it is more than $50 per brake unit. Thus, if the Brake Division is forced to pay the regular $7.50 price for the X52 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well- being of both his division and the company as a whole. Weller Industries uses return on investment (ROI) to measure divisional performance. CASE 1126 Transfer Pricing; Divisional Performance Q1L0113 Weller Industries is a decentralized organization with six divisions. The company's Electrical Division produces a Page 534 variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $7.50 each; the fitting has a variable manufacturing cost of $4.25. The company's Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $5 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows: Purchased parts (from outside vendors) $22.50 Electrical fitting X52 5.00 Other variable costs 14.00 Fixed overhead and administration 8.00 Total cost per brake unit $49.50 Although the $5 price for the XS2 fitting represents a substantial discount from the regular $7.50 price, the manager of the Brake Division believes the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard "through the grapevine" that the airplane manufacturer plans to reject his bid if it is more than $50 per brake unit. Thus, if the Brake Division is forced to pay the regular $7.50 price for the X52 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well- being of both his division and the company as a whole. Weller Industries uses return on investment (ROI) to measure divisional performance