A manufacturing company has two divisions: Motor and Pump. The Motor Division produces an intermediate good, which is a motor that can be used as an input for the Pump Division. The Motor Division also sells the motors in the open market. The Pump Division assembles the parts together to make water pumps which are sold to the consumers. The Pump Division needs an average of 10,000 motors every year. A transfer price based on the variable cost is mandated.

	Motor Division			Pump Division
Market selling price	$20		Selling price	$80
Variable cost	12		Variable cost (other than the motor)	30
Contribution margin	$ 8		Variable cost of the motor (purchased from an outside supplier)	19
			Contribution margin	$31

1. If the Motor Division has no excess capacity, what is the net result of the variable cost-based transfer pricing policy?
   1. A gain of $2 per unit
   2. A loss of $1 per unit
   3. $0
   4. There is not enough information to determine the net result.

2. If the Motor Division has available capacity to handle the Pump Divisions demand, what is the net result of the variable cost-based transfer pricing policy?
   1. A gain of $7 per unit
   2. A gain of $4 per unit
   3. A loss of $7 per unit
   4. A loss of $2 per unit