Friends Inc has two divisions. Division David makes and sells Calculators. Division Michael manufactures Batteries. Each calculator has a battery as one of its components. Division David needs 10,000 batteries for the coming year and can purchase batteries at a cost of $30 from an outside vendor. Division Michael has the capacity to manufacture 50,000 batteries annually. Sales to outside customers are estimated at 40,000 batteries for the next year. It sells batteries for $35 each. Variable costs are $29 per battery and include $2 of variable sales costs that are not incurred if division Michael sells batteries internally to division David. The total amount of fixed costs for division Michael is $80,000.

Required:

Consider the following independent situations:

A. What should be the minimum transfer price division Michael accepts for the 10,000 batteries and the maximum transfer price division David pays?

B. Suppose division Michael could use the excess capacity to produce and sell externally 20,000 units of a new product at a price of $18 per unit. The variable cost for this new product is $15 per unit. What should be the minimum transfer price division Michael accepts for the 10,000 batteries and the maximum transfer price division David pays?

C. If division David needs 15,000 batteries instead of 10,000 during the next year, what should be the minimum transfer price division Michael accepts and the maximum transfer price division David pays?

D. The CEO of Friends Inc. calls an urgent meeting with the managers of Division Michael and David. The CEO proceeds to demand that Division Michael transfer the 15,000 batteries to Division David at the variable cost of production. Using your new expertise in transfer pricing, calculate the benefit of each division and is this transfer in the best interest of Friends Inc.?