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 50,000 units of excess capacity. Selling Division currently sells the product for $35 per unit and Buying Division currently buys 50,000 units of the product from an outside source for $35 per unit. Variable costs of the product are $7, of which $1.75 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 Transfer Price

$30 $14

Increase in net income of Selling Division $_______ $________

Increase in net income of Buying Division $_______ $________

Increase in net income of Overall Corporation $_______ $_________