Amazon.com, Inc. has two divisions, Retail and Logistics. The Retail division purchases products from the Logistics division. The following information is provided:
•Variable cost per unit in Logistics: $50
•Fixed cost per unit in Logistics: $20
•Selling price to external customers: $100
•Transfer price to Retail: $80
Required:
1.Calculate the contribution margin for the Logistics division.
2.Determine the impact of the transfer price on the profitability of both divisions.
3.Discuss the benefits and challenges of transfer pricing within an organization.