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 28,000 units of excess capacity. Selling Division currently sells the product for $25 per unit and Buying Division currently buys 28,000 units of the product from an outside source for $25 per unit. Variable costs of the product are $5, of which $1.25 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 $5) and that Buying Division buys 28,000 units from Selling Division. Complete the table for each transfer price:

Transfer PriceTransfer Price$20$12Increase in net income of Selling Division$$Increase in net income of Buying Division$$Increase in net income of Overall Corporation$$