Rug, Inc. has acquired a new backing division that produces rubber backing, which it sells for $2.20 per square yard. Sales are about 1,200,000 square yards per year. Since the Backing Division has a capacity of 2,000,000 square yards per year, top management is thinking that it might be wise for the company's Tufting Division to start purchasing from the newly acquired Backing Division. The Tufting Division current purchases the following from an outside supplier: 600,000 square yards per year $2.10 Price paid to outside supplier The Backing Division's cost per square yard follows: Direct materials Direct Labor Variable overhead Fixed overhead (1.200.000 level) Total cost $1.10 0.33 0.25 0.10 $1.78 Required: 1. If both divisions are to be treated as investment centers and eadh divisions' performance is evaluated by the ROI formula, what transfer price would you recommend that would benefit each division? You must provide a detailed accounting explanation of why you picked this transfer price and why. Using the transfer pricing accounting concepts explain the highest price that would be used in this situation? Why? Using the transfer pricing accounting concepts explain the lowest price that would be used in this situation? Why? 2. Determine the total effect on corporate profits of making the backing. Make sure you show your calculations. 3. Based on your transfer price, would you expect the ROI in the Backing Division to increase, decrease, or remain unchanged? Explain. 4. What would be the effect on the ROI of the Tufting Division using your transfer price? Explain