(Transfer Pricing Question) Managerial Accounting

Ampro Inc. has two division. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one its components. Division A needs 10,000 lamps for the coming year and can purchase reading lamps at a cost of $10 from an outside vendor. Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are estimated at 40,000 lamps for the next year. It sells reading lamps for $12 each. Variable costs are $8 per lamp and include $1 of variable sales costs that are not incurred if division B sells lamps internally to division A. The total amount of fixed costs for division B is $80,000.

Consider the following independent situations:

a) What should be the minimum transfer price division B accepts for the 10,000 lamps and the maximum transfer price division A pays? Justify your answer.

b) Suppose division B could use the excess capacity to produce and sell externally 20,000 units of a new product at a price of $8 per unit. The variable cost for this new product is $6 per unit. What should be minimum transfer price division B accepts for the 10,000 lamps and the maximum transfer price division A pays? Justify your answer.

c) If division A needs 15,000 lamps instead of 10,000 during the next year, what should be the minimum transfer price division B accepts and the maximum transfer price division A pays? Justify your answer.