Case $11-26($Static$)$ Transfer Pricing; Divisional Performance $[$LO$11-3]$

Weller Industrles is a decentralized organization with six divisions. The company's Electrical Division produces a varlety of electrical

Items, Including an $52$ electrical fitting. The Electrical Division $($which is operating at capacity$)$ sells this fitting to its regular customers

for $$7\mathrm{.}50$ each; the fitting has a varlable manufacturing cost of $$4\mathrm{.}25.$

The company's Brake Division has asked the Electrical Division to supply it with a large quantity of $x52$ fittings for only $$5$ each. The

Brake Division, which Is operating at $50\%$ of capacity, will put the fitting into a brake unit that it will produce and sell to a large

commercial alrline manufacturer. The cost of the brake unit belng bullt by the Brake Division follows:

Although the $$5$ price for the $52$ fitting represents a substantial discount from the regular $$7\mathrm{.}50$ price, the manager of the Brake

Division belleves the price concession Is necessary if his division is to get the contract for the alrplane brake units. He has heard

"through the grapevine" that the alrplane manufacturer plans to reject his bid if it is more than $$50$ per brake unit. Thus, if the Brake

Division is forced to pay the regular $$7\mathrm{.}50$ price for the $x52$ fitting, It will elther not get the contract or it will suffer a substantlal loss at a

time when it Is already operating at only $50\%$ of capacity. The manager of the Brake Division argues that the price concession is

imperative to the well$-$being of both his division and the company as a whole.

Weller Industrles uses return on Investment $($ROI$)$ to measure divisional performance.

Required:

Assume that you are the manager of the Electrical Division.

a$.$ What is the Electrical Division's lowest acceptable transfer price?

b$.$ Would you supply the $x52$ fitting to the Brake Division for $$5$ each as requested?

Assuming the alrplane brakes can be sold for $$50,$ what is the financlal advantage $($disadvantage$)$ for the company as a whole $($on a

per unit basis$)$ if the Electrical Division supplies fittings to the Brake Division?

In princlple, within what range would the transfer price lle?

Note: For all requirements, enter your "FInanclal Disadvantage" amounts as a negatlve value and round your final answers to $2$

decimal places.