Transfer Pricing

Keepit Corporation has two divisions: Ottawa and Cornwall.Ottawa currently sells a condenser to manufacturers of cooling systems for $520 per unit.Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace.

Keepit is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Cornwall.Related information about the enhanced system follows.

Selling price of refrigeration system: $1,285

Additional variable manufacturing costs required: $820

Transfer price of condenser: $490

Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired.The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management.

Required:

A.How would Ottawa's divisional manager likely react to the decision to transfer condensers to Cornwall?Show computations to support your answer.

B.How would Cornwall's divisional management likely react to the $490 transfer price?Show computations to support your answer.

C.From a contribution margin perspective, does Keepit benefit more if it sells the condensers externally or transfers the condensers to Cornwall?By how much?