Transfer pricing company is a two division firm, consisting of a manufacturing division and a distribution division. Manufacturing division produces a single product, called product X. The cost of producing product X consists of a variable cost of $50 per unit, and a fixed cost of $100 per unit. This fixed cost per unit is calculated assuming that Manufacturing runs at its capacity of 10,000 units. Assume there is an external customer that contracts with Manufacturing to buy up to 4,000 units of product X for $200 per unit. More precisely, assume that the external customer will pay $200 per unit for any number of units that Manufacturing ships to it, up to 4,000 units, but it will not buy more than 4,000 units.

1. The distribution division wants 1,000 units of product X from the manufacturing division. Calculate the transfer price for the internal transfer of 1,000 units of product X according to the general transfer pricing rule. (Recall that under the general transfer pricing rule, each division acting in its own self interest will maximize the profit of the company)

A. $ 50,000

B. $ 200,000

C. $ 300,000

D. $ 150,000

2. Assume that the distribution division wants 4,000 units of product X from the manufacturing division. Calculate the transfer price for the internal transfer of 4,000 units of product X according to the general transfer pricing rule.

A. $ 1,200,000

B. $ 200,000

C. $ 600,000

D. $ 800,000

Please explain why 1 is A and 2 is B.