1. Transfer Pricing

Fillmore Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers. Fillmores Systems Division manufactures scientific instruments and uses the products of two of Fillmores other divisions. The Board Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the Systems Division are as follows:

	PCB		Transistor
Direct materials	$1.80		$0.40
Direct labor	4.20		0.80
Variable overhead	2.30		0.70
Fixed overhead	0.80		0.70
Total cost	$9.10		$2.60

The Board Division sells its commercial product at full cost plus a 30 percent markup and believes the proprietary board made for the Systems Division would sell for $12 per unit on the open market. The market price of the transistor used by the Systems Division is $3.45 per unit.

Required:

1. What is the minimum transfer price for the Transistor Division? What is the maximum transfer price of the transistor for the Systems Division?

2. Assume the Systems Division is able to purchase a large quantity of transistors fro an outside source at $2.75 per unit. Further assume that the Transistor Division has excess capacity. Can the Transistor Division meet this price?

3. The Board and Systems divisions have negotiated a transfer price of $11 per printed circuit board. Discuss the impact this transfer price will have on each division. (CMA adapted)