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 20,000 units of excess capacity. Selling Division currently sells the product for $65 per unit and Buying Division currently buys 20,000 units of the product from an outside source for $65 per unit. Variable costs of the product are $13, of which $3.25 is the cost of selling the product to an outside customer.

UsingSelling price less avoidable costsas the minimum price, fill in the following formula for the desired transfer price: $_______< transfer price < $______.

UsingVariable costsas the minimum price, fill in the following formula for the desired transfer price: $______< transfer price < $______.

Assume there are no avoidable costs with an internal sale (variable costs equal $13) and that Buying Division buys 20,000 units from Selling Division. Complete the table for each transfer price:

Transfer Price Transfer Price

$60 $20

Increase in net income of Selling Division $_______ $_____

Increase in net income of Buying Division $______ $_____

Increase in net income of Overall Corporation $_______ $______