Oxford Scientific Products is a vertically integrated firm with several divisions that operate as decentralized profit centers.Oxford's Systems Division manufactures scientific instruments and uses the products of two of Oxford's other divisions, as follows:

Transistor Division

Systems Division

The products of the Transistor Division are sold in a well-developed competitive market; one transistor model that is sold in these markets is also used by the Systems Division.The market price of the transistor used by the Systems Division is $3.70 per unit.

The Board Division manufactures printed circuit boards (PCBs).One PCB model is made exclusively for the Systems Division using proprietary designs, while only less-complex models are sold in outside markets.The Board Division sells its products in outside markets at full cost plus a 25 percent markup, and believes the proprietary board made for the Systems Division would sell for $12.25 per unit if there were an outside market.

The costs per unit of the products used by the Systems Division are presented below:

TransistorBoard

Direct materials$0.80$2.50

Direct labor1.004.50

Variable overhead0.502.00

Fixed overhead0.750.80

Total cost$3.05 $ 9.80

Transfers between Transistor and Systems

1.Assume that the Systems and Transistor Divisions are operating at full capacity and can sell all they produce to outside customers.What is the minimum transfer price the Transistor Division should be willing to accept from Systems?What is the maximum transfer price the Systems Division should be willing to pay to the Transistor Division?

3.7-3.05= 0.65

2.Assume the Systems Division is able to purchase a large quantity of transistors from an outside source at $2.90 per unit.Further assume that the Transistor Division has excess capacity.Can the Transistor Division meet this price?

Transfers between Board and Systems

3.The Board and Systems Divisions have negotiated a transfer price of $11 per printed circuit board.Why are both division managers happy with this price?What might be the problem with this price?What is a problem with using negotiations in this setting?