Mr$.$ Massee, Vice President of Production, is looking at two of the divisions that report to him. These divisions are viewed as profit centers by the company. He has called in the head of the Brake Division, which provides a part used by the Wheel Division, because he has noticed that the Wheel Division is going to an external supplier for the part. Mr$.$ Omsby, the head of the Brake Division, tells him that he has set the transfer price at $$38$ per part even though the external price is $$33$ per part. The standard unit$-$level cost is $$22.$ "I have set the $$38$ price because I am operating with no excess capacity and do not want to have the internal transfer to the Wheel Division. I have some good external customers and do not want to lose them by selling internally. If I had excess capacity, I would be willing sell to the Wheel Division at a lower price."

Mr$.$ Massee says that he has to think about this situation because something doesn't seem right to him. After Mr$.$ Omsby leaves the office, he calls his friend in the controller's department for some help.

Required:

Assume you are the friend that Mr$.$ Massee calls. Explain to Mr$.$ Massee the differences in transfer pricing when there is no excess capacity and when there is excess capacity and what Mr$.$ Omsby is doing wrong.