Problem 2 Transfer Pricing - 10 marks - 20 minutes
The Widget Corporation has several divisions. Monterey Division produces and sells part ABC, which it sells in the outside market for $45 per unit. Monterey Divisions annual capacity is 100,000 units of part ABC per year of which it currently sells 75,000. The per unit cost to produce part ABC (based on production capacity) is:
	Direct materials	$ 3.00
	Direct labour	11.00
	Variable overhead	7.00
	Fixed overhead	2.50
		$ 23.50
Gilroy Division currently uses part ABC in one of their products and purchases 40,000 units of part ABC annually from an external supplier for $38 per unit.
Required:
Assume that the Widget Corporation is contemplating a transfer of 40,000 units of part ABC from Monterey Division to Gilroy Division.
a.	What is the minimum transfer price? (3 marks)
b.	What is the maximum transfer price? (1 mark)
c.	What is the overall net benefit to Widget Corporation if a transfer takes place between the two divisions? (3 marks)
d.	Assume that the two Widget Divisions agree on a transfer price of $36 per part ABC. What is the net benefit to each of the two divisions? (3 marks)