Robin Companys A Division produces a small component used by other companies as a key part in their products. Cost and sales data relating to the component are given below:

Selling price per unit $50

Variable costs per unit 30

Fixed costs per unit 12*

*Based on A Divisions capacity of 40,000 component per year.

Robin Companys B Division is introducing a new product that will use a component such as the one produced in the A Division. An outside supplier has quoted the B Division a price of $48 per component. The B Division would like to purchase the components from the A Division instead if an acceptable transfer price can be worked out.

The B Division requires 12,000 components per year and the A Division is presently selling 34,000 components per year to outside customers.

Required:

a. From the standpoint of the entire company, what is the incremental benefit to the company if the A Division supplies the B Division with 12,000 components per year?

b. Calculate the maximum and minimum transfer price per unit.

c. Assume the managers of the two divisions agree on a transfer price of $46 per component. Calculate the net benefit to each division of making a transfer of 12,000 components per year.