Scottsdale Manufacturing is organized into two divisions: Fabrication and Assembly. It evaluates both divisions as profit centers. Components transferred from the Fabrication division to the Assembly division are recorded at a predetermined transfer price. Variable manufacturing costs per unit in the Fabrication division are $500. At the present time, the Fabrication division is operating at full capacity. The Fabrication division can sell the units it produces on the external market for $650. It's external sales are through a manufacturer's representative, to whom the Fabrication division pays a 10% sales commission.

Why are transfer prices needed in this situation? Using the general transfer pricing rules we discussed in class, what is the appropriate transfer price? Explain your answer.