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 11,000 units of excess capacity. Selling Division currently sells the product for $45 per unit and Buying Division currently buys 11,000 units of the product from an outside source for $45 per unit. Variable costs of the product are $9, of which $2.25 is the cost of selling the product to an outside customer.

Using Selling price less avoidable costs as the minimum price, fill in the following formula for the desired transfer price: $ < transfer price < $.

Using Variable costs as 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 $9) and that Buying Division buys 11,000 units from Selling Division. Complete the table for each transfer price:

	Transfer Price	Transfer Price
	$40	$16
Increase in net income of Selling Division	$	$
Increase in net income of Buying Division	$	$
Increase in net income of Overall Corporation	$	$