In each of the cases below, assume that Division $x$ has a product that can be sold either to outside customers or to Division $Y$ of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits:

Division $Y$ :

Number of units needed for production

Purchase price per unit now being paid to an outside supplier

$$\{\begin{array}{ccc}\text{:}[25,& 000,25,& 000]\\ 5,& 50,& \text{\$}\end{array}$

Required:

$1-$a$.$ Refer to the data in case A above. Assume that $$3$ per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division.

Transfer price

$1-$b$.$ If the managers are free to negotiate and make decisions on their own, will a transfer take place?

Yes

No