4. Maximum Negotiated Transfer Price 5. In Between Negotiated Transfer Price Overall Corporation has two divisions, Buying Division and Selling Division. Currently, Buying Division buys product from an outside company for $40. Selling Division has excess capacity and sells the same product for $40. The product costs Selling Division $15, none of which is avoidable for internal sales. Which of the following are true? Any transfer price between $15 and $40 will benefit Overall Corporation. True If the transfer price is $18, there is no benefit to Selling Division. False Both Buying Division and Selling Division will benefit from a transfer price of $35. True If the transfer price is $39, there is no benefit to Selling Division. False Cost Method If an established market price does not exist, product cost may be used for the transfer price. A market price may not exist when the Selling Division is making a product specifically for Buying Division and no other customers exist for this exact product. How this transfer price affects the income of each division and the Overall Corporation depends on whether the Selling Division is operating at capacity and whether it produces other products that it sells to outside customers. Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division makes a product that is sold only to Buying Division. Each unit of the product costs $10 to produce. Selling Division is Buying Division's only source of this product. The use of cost for the transfer price will not encourage Selling Division to limit production of this product and False increase production of another product which it sells to outside customers. The cost method of setting a transfer price is usually only used when the Selling Division is organized as a cost True center. If Buying Division is organized as a cost center, buying a product at cost will benefit the division. True If Overall Corporation sets the transfer price at $10, Selling Division will benefit by selling units to Buying Division. False APPLY THE CONCEPTS: Determining benefits of negotiated transfer price Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division sells a product that is used by Buying Division and outside customers. Selling Division has 35,000 units of excess capacity. Selling Division currently sells the product for $30 per unit and Buying Division currently buys 35,000 units of the product from an outside source for $30 per unit. Variable costs of the product are $6, of which $1.5 is the cost of selling the product to an outside customer. Using Selling price less avoidable costs as the minimum price, fill in the following formula for the desired transfer price: $ transfer price