Ajax Division of Carlyle Corporation produces electric motors, 20,000 of which are sold to Bradley Division of Carlyle and the remainder is sold to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of supply and to whom they sell. Corporate policy requires variable cost be used as the transfer price for all interdivisional sales and purchases. Ajax Divisions estimated revenues and costs for the coming year, based on the full capacity of 100,000 units, are as follows:

Bradley External Customers

Revenues $ 900,000 $8,000,000

Variable costs 900,000 3,600,000

Contribution margin -0- 4,400,000

Fixed costs 300,000 1,200,000

Operating income $(300,000) $3,200,000

Unit sales 20,000 80,000

Ajax Division has an opportunity to sell the 20,000 motors to an external customer at a price of $75 per unit on a continuing basis beginning next year. Bradley can purchase its requirement of 20,000 motors from an external supplier at a price of $85 per unit.

a. Compute the increase/decrease in Ajax Divisions operating income if Ajax discontinues the sales to Bradley and adds the new customer for the coming year. Assume Ajaxs fixed costs are unavoidable.

b. Instead of using variable cost as the transfer price, assume Carlyle permits the division managers to negotiate the transfer price for next year. The managers agree on a transfer price: $75 per unit minus an equal sharing between the divisions of the additional operating income earned by Ajax from selling Bradley the 20,000 motors at $75 per unit. Compute the transfer price for next year.