Sacramento Seedlings, Inc. has two divisions -- Retail and Nursery.The Retail division sells plants and supplies.The Nursery division takes tree seedlings and grows them to healthy young plants before selling the plants internally to the Retail division and to outside commercial customers.The Nursery division's variable costs are $4 per plant, and each plant is sold to outside customers for $6.Each division manager is evaluated based on overall company profit rather than profit produced by each division.

1. Assume the Nursery division isbelow capacityand will not sacrificeany sales to outside customers if it sells to the Retail division. What transfer price would you recommend to maximizeoverall company profit?
2. Assume the Nursery division isat capacityand will sacrifice sales to outside customers if it sells to the Retail division. What transfer price would you recommend to maximizeoverall company profit?
3. Suppose each division manager is evaluated based on the profit generated within each division rather than overall company profit.What motivational issues might arise related to transfer pricing with this approach to evaluating division managers?