The ZZTop Inc. sells a specialized tool that it sells and makes one of the components, a

specialized bolt, the tool requires. The company has two separate departments, one that makes

the special bolt, Department X, and sells it to the open market at a price of $45 and Department

Z builds the specialized tool requiring the specialized bolt.

Department X's sells 75,000 specialized bolts annually and has capacity to produce up to

100,000 per year. The cost to make the specialized bolt (based on capacity) is:

Direct materials $10

Direct labour $6

Variable overhead $8

Fixed overhead $10

Department Z purchases 40,000 units yearly of the specialized bolt from an external supplier for

$42 per bolt.

ZZTop is evaluating having Department X buy the 40,000 specialized bolts from Department Z.

Required:

A. What is the minimum transfer price and the maximum transfer price?

B. What is the overall net benefit to ZZTop if a transfer takes place between the two

divisions?

C. Assume that the two division agree on a transfer price of $38 per widget. What is

the net benefit to each of the two divisions?

D. What is your recommendation to decision-makers on what they should do?