Below is the questions I am having trouble understanding.I am totally confused on #1 because if the nursery sells to the retail division by a transfer cost it will still be sold to outside customers. So the questions seems contradictory. Also, I don't know how I am supposed to know what the below capacity would be. Is there supposed to be a formula that I don't remember? The only answers I can think of is:

Answer to 1: if the nursery is below capacity I think the nursery division should sell each plant to the retail division at $5.75 per plant because the retail division can still make profit on other products they sell.

Answer to 2: if the nursery is at capacity I think the nursery division should sell each plant to the retail division at $5.25 per plant. Because there is more volume for the nursery they will be more profitable, so they can afford to lower the price.

Can someone please review, and let me know if I am totaly off track on what the answers should be?

Sacramento Seedlings, Inc. has two divisions -- Retail and Nursery.The Retail division sells plants and supplies.The Nursery division takes tree seedlings and grows them to healthy young plants before selling the plants internally to the Retail division and to outside commercial customers.The Nursery division's variable costs are $4 per plant, and each plant is sold to outside customers for $6.Each division manager is evaluated based on overall company profit rather than profit produced by each division.

1.Assume the Nursery division isbelow capacityand will not sacrificeany sales to outside customers if it sells to the Retail division. What transfer price would you recommend to maximizeoverall company profit?Be sure to provide sufficient details to support your recommendation.

2.Assume the Nursery division isat capacityand will sacrifice sales to outside customers if it sells to the Retail division. What transfer price would you recommend to maximizeoverall company profit?Be sure to provide sufficient details to support your recommendation.