12.58 Transfer pricing (L05, Appendix). Quest Computers, Inc., makes microprocessor chips and personal computers. Its Microprocessor Division makes the chips and supplies them to the Personal Computer Division. The Personal Computer buys all the other necessary parts from outside vendors and assembles personal computers for home and business use. There is also a ready outside market for microprocessor chips made by the Microprocessor Division. The following cost and market data pertains to the two divisions: Average estimated selling price for the personal computer Market price for the microprocessor chip (per unit) Variable costs in Personal Computer Division (excluding chip) Variable costs for making the chip $1,000 $250 $820 $100 The two divisions are profit centers. While Quest Computers, Inc., would not like its Microprocessor division to sell the advanced microprocessor chip to other computer manufacturers in the outside market, it nevertheless allows its divisional managers complete latitude in decision making. The manager of the Microprocessor Division prefers to charge the Personal Computer Division the market price for transferring the chips. The manager of the Personal Computer Division makes the following calculations: Selling price-final product Transferred-in costs (market). $1,000 $250 Variable costs for completion $820 $1,070 Contribution (loss) on product $(70) Required: a. From the point of view of Quest Computers, should transfers be made to the Personal Computer Division if there is no excess capacity in the Microprocessor Division? Is the market price the correct transfer price? b. Assume that the Microprocessor Division has the capacity to make 50,000 chips, and it can sell only 37,500 chips to the outside market at a price of $250 (assume for various reasons, the division is not willing to reduce this price). From the point of view of Quest Computers, should the remaining 12,500 chips be transferred to the Personal Computer Division? c. Suppose the Microprocessor Division can sell all 50,000 chips if it reduces the market price to $225. From the point of view of Quest Computers, should transfers be made to the Personal Computer Division? If yes, is market price the correct transfer price?