Total Control Corporation consists of two business units: Batteries Division and Medical Devices Division. The Batteries Division makes and sells lithium batteries. The Medical Devices Division makes and sells numerous medical devices to hospitals and health-care systems. Total Control Corporation does not allow its divisions to have any inventories.

Batteries Division. The Batteries Division sells its single product - a miniaturized long-lasting highly efficient lithium battery pack LBP20 - to numerous manufacturers of consumer electronics. The selling market is highly competitive, with many similar batteries sold by many suppliers. We can sell as many LBP20 units as we would like at the prevailing market price of $129 per unit.

The division's annual fixed manufacturing costs are $4,800,000; annual fixed selling and admin costs are $600,000. The Production Division's annual practical capacity is 239,700 LBP20 units. The division uses practical capacity (in units) to allocate fixed manufacturing costs to units; the inventoriable absorption cost using practical capacity per LBP20 is $97.73. (The Batteries Division's controller is not concerned about using practical-capacity-based unit cost - the controller assures us that the absorption cost per unit under GAAP would also equal $97.73.) The variable selling cost is $7 per unit.

Medical Devices Division. This division makes and sells a large portfolio of professional medical devices, ranging from consumer blood-pressure monitors to surgically-implantable pacemakers. The division's annual fixed manufacturing costs are $7,300,000; annual fixed selling and admin costs are $1,900,000. The division uses practical capacity (in machine hours) to allocate fixed manufacturing costs to units. New Product Developed by The Medical Devices Division. The Medical Devices Division design team recently developed a new medical device, code-named SafetyNet. The new device requires a small highly efficient battery. Batteries in medical devices require extensive government-mandated certification; the Medical Devices Division was not able to find a suitable external maker willing to submit to this certification. The division's design team studied LBP20's currently made and sold by the Batteries Division and determined that these were not usable in the SafetyNet without extensive modifications. The design team then approached the Batteries Division to explore the possibility of using extensively modified LBP20s in the newly developed SafetyNet product. Analysis by the Batteries Division determined that modified LBP20s would cost the same to make as the currently made LBP20s. Modified LBP20s would not incur any variable selling costs.

The Batteries Division management team refused to conduct the required government-mandated certification - the division did not have any medical-certification experts. Thus, the certification would have to be obtained and paid for by the Medical Devices Division (the division estimates that certification would have a one-time cost of approximately $900,000). Total Control Corporation's CFO is considering using negotiated transfer pricing to guide potential trade between the two divisions. The CFO's reasoning is: "The top teams of both divisions are highly qualified, superbly competent managers, always making the right decisions. They should be allowed to come to an agreement." The CFO is also considering using cost-based transfer prices "... to keep things simple and limit a chance of conflict."

11.1 [10 points]. If the CFO decides to use cost-based transfer pricing, what is the correct transfer price?

11.2 [10 points]. If the CFO decides to use negotiated transfer pricing, what is the minimum transfer price acceptable to the Batteries Division?

11.3 [5 points]. If the CFO decides to use negotiated transfer pricing, what is the maximum transfer price acceptable to the Medical Devices Division?

A. $97.73

B. $122.81

C. $129.00

D. $136.88

E. There is not enough information to compute the maximum transfer price acceptable to Medical Devices