1. Discuss the issue of using absorption costing in calculating transfer price in a cost plus pricing method. (1.5 marks) 2. Briefly explain how transfer price is determined using the negotiated prices method. (1.5 marks) PART B: Collyer Products, Inc., has a Valve Division that manufactures and sells a standard valve: Capacity in units 100,000 Selling price to outside customers $30 Variable costs per unit $16 Fixed costs per unit (based on capacity) $9 Page 12 of 14 The company has a Pump Division that could use this valve in one of its pumps. The Pump Division is currently purchasing 10,000 valves per year from an outside supplier at a cost of $29 per valve. REQUIRED

1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Divisions needs.

(i) Calculate the minimum transfer price using the general formula. (2 marks) (ii) What is the acceptable range, if any, for the transfer price between the two divisions? (1 mark)

2. Assume that the Valve Division is selling all of the Valves that it can produce to outside customers.

(i) Calculate the minimum transfer price using the general formula. (2 marks)

(ii) Do you think the transfer will take place between the two Divisions? Briefly explain. (1 marks)

3. Assume again that the Valve Division is selling all of the valves that it can produce to outside customers. Also assume that $3 in variable expenses can be avoided on transfers within the company, due to reduced selling costs.

(i) How much additional total contribution margin does Valve Division make for selling to Pump Division at the average price between the minimum and maximum transfer prices? [Hint: Re-calculate the minimum Transfer price using the assumptions described in requirement 3.] (3 marks)

(ii) How much cost savings in total does Pump Division make for buying from Valve Division using the average price calculated in (3) (i) above? (2 marks)

(iii) What is the total overall profit that Collyer Products, Inc., makes for the transfer to take place at the average price calculated in (3) (i) above? (1 mark