ME and YOU are two divisions of a company. ME makes two products, Product A and Product B. Product A is commercialized outside the company and its SP is $170. Product B is only sold to Division YOU, at a unit transfer price of $176. Unit costs for Product B are as follows:
Variable materials - 60 Variable
labour - 40
Variable overheads - 40
Fixed overheads - 20
Division B has received an offer from another company to supply a substitute for Product B, for $152 per unit.
Assuming Division ME can sell as much of Product A as it can produce and the unit profitability of Products A and B are equal,
A. What is the minimum and maximum transfer price?
B. What will be the effects on profits of the company as a whole if Division YOU accepts the offer?