Gibson Radio Corporation is a subsidiary of Salem Companies. Gibson makes car radios that it sells to retail outlets. It purchases speakers for the radios from outside suppliers for $68 each. Recently, Salem acquired the Rundle Speaker Corporation, which makes car radio speakers that it sells to manufacturers. Rundle produces and sells approximately 400,000 speakers per year, which represents 70 percent of its operating capacity. At the present volume of activity, each speaker costs $52 to produce. This cost consists of a $42 variable cost component and an $10 fixed cost component. Rundle sells the speakers for $72 each. The managers of Gibson and Rundle have been asked to consider using Rundles excess capacity to supply Gibson with some of the speakers that it currently purchases from unrelated companies. Both managers are evaluated based on return on investment. Rundles manager suggests that the speakers be supplied at a transfer price of $72 each (the current selling price). On the other hand, Gibsons manager suggests a $68 transfer price, noting that this amount covers total cost and provides Rundle a healthy contribution margin.

Required

a. Based on market prices suggested by the managers, which transfer price would you recommend?

Transfer price