II. In each of the cases below, assume that Division Hard has product that can also be sold to Division Soft for use in its production process.

Division Hard:

Capacity in units

Case1: 120,000

Case2: 150,000

Units sold to intermediate market

Case1: 120,000

Case2: 110,000

Unit sales price on the intermediate market

Case1: P 60

Case2: P 40

Unit variable cost per unit

Case1: 40

Case2: 20

Fixed cost per unit (based on capacity)

Case1: 8

Case2: 6

Division Soft:

Number of units needed for production

Case1: 40,000

Case2: 40,000

Purchase price per unit form an outside supplier

Case1: P57

Case2: P39

Required:

1. Assume in Case 1 that P2 per unit of variable selling costs can be avoided on intracompany sales,

a. What price should be charged by Division Hard to Division Soft, where: transfer price formula = unit incremental costs plus opportunity costs.

b. Will any transfer be made between the two divisions?

2. Refer to Case 2, what is the normal range in determining the transfer price?