J. English Electronics Inc. manufactures a variety of printers, scanners, and fax machines in its two divisions:the PSF Division and the Components Division.The Components Division produces electronic components than can be used by the PSF Division.All the components this division produces can be sold to outside customers.However, from the beginning, nearly all of its output has been used internally.The current policy requires that internal transfers of components be transferred at full cost.

Recently, Cam DeVonn, the chief executive officer of J. EnglishElectronics, decided to investigate the transfer pricing policy.He was concerned that the current method of pricing internal transfers might force decisions by divisional managers that would be suboptimal for the firm.As part of his inquiry, he gathered some information concerning Component Y34, which is used by the PSF Division in its production of a basic scanner, Model SC67.

The PSF Division sells 40,000 units of Model SD67 each year at a unit price of $42.Given current market conditions, this is the maximum price that the division can charge for Model SC67.The cost of manufacturing the scanner follows:

Components Y34$ 6.50

Direct materials12.50

Direct labor3.00

Variable overhead1.00

Fixed overhead15.00

The scanner is produced efficiently, and no further reduction in manufacturing costs is possible.

The manager of the Components Division indicated that she could sell 40,000 units (the division's capacity for this part) of Component Y34 to outside buyers at $12 per unit.The PSF Division could also buy the part for $12 from external suppliers.She supplied the following details on the manufacturing cost of the component:

Direct materials$ 2.50

Direct labor0.50

Variable overhead1.00

Fixed overhead2.50