Transfer Pricing

II. In each of the cases below, assume that Division Hard has product that can also be sold to Division Soft for use in its production process. Case 1 Case 2 Division Hard: Capacity in units 120,000 150,000 Units sold to intermediate market 120,000 110,000 Unit sales price on the intermediate market P 60 P 40 Unit variable cost per unit 40 20 Fixed cost per unit (based on capacity) 8 6 Division Soft: Number of units needed for production 40,000 Purchase price per unit form an outside supplier P57 40,000 P39 Required: 1. Assume in Case 1 that P2 per unit of variable selling costs can be avoided on intracompany sales, a. What price should be charged by Division Hard to Division Soft, where: transfer price formula = unit incremental costs plus opportunity costs. b. Will any transfer be made between the two divisions? 2. Refer to Case 2, what is the normal range in determining the transfer price?