Hello Inc. has two divisions A, and B, which manufacture expensive bicycles. Division A produced the bicycle fame and Division B assembles the rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each division has been designated as a profit centre. The transfer price for the subassembly has been set at the long-run average market price. Assume that Division A's maximum capacity for this product is 1,400 units per month and sales to be intermediate market are now 1,190 units. The data available for each division are in the accompanying table

Division Data:

Selling price for final product $310

Long-run average selling price for intermediate product 220

Incremental cost per unit for completion in Division B 145

Incremental cost per unit in Division A 100

The manager of Division B has made the following calculation:

Selling price for final product 310

Transferred-in cost per unit (market) 220

Incremental cost per unit for completion 145 365

Contribution (loss) on product (55)

Requirement 1: Suppose the manager of Division A has the option of a) cutting the external price to $215, with the certainty that sales will rise to 1,400 units or b) maintaining the external price of $220 for the 1,190 units and transferring the 210 units to Division B at a price that would produce the same operating income for consistent with that recommended by the general guideline in the chapter so that the resulting decision would be desirable for the company as a whole?

Begin by calculating the contribution different if transfers are made to Division B when there is no unused capacity in Division A, under scenario a) and b).

What is the contribution alternative in a)

What is the contribution alternative in b)

Calculate the correct transfer price (hint: increment cost per unit + opportunity cost per unit = minimum transfer price