Transfer Pricing with Idle Capacity Oriole, Inc., owns a number of food service companies. Two divisions are the Coffee Division and the Donut Shop Division. The Coffee Division purchases and roasts coffee beans for sale to supermarkets and specialty shops. The Donut Shop Division operates a chain of donut shops where the donuts are made on the premises. Coffee is an important item for sale along with the donuts and, to date, has been purchased from the Coffee Division. Company policy permits each manager the freedom to decide whether or not to buy or sell internally. Each divisional manager is evaluated on the basis of ROI and residual income. Recently, an outside supplier has offered to sell coffee beans, roasted and ground, to the Donut Shop Division for $4.30 per pound. Since the current price paid to the Coffee Division is $4.75 per pound, Ashleigh Tremont, the manager of the Donut Shop Division, was interested in the offer. However, before making the decision to switch to the outside supplier, she decided to approach Santigui Melendez, manager of the Coffee Division, to see if he wanted to offer an even better price. If not, then Ashleigh would buy from the outside supplier. Upon receiving the information from Ashleigh about the outside offer, Santigui gathered the following information about the coffee: Direct materials Direct labor $0.95 0.45 Variable overhead 0.72 Fixed overhead 1.53 Total unit cost $3.65 *Fixed overhead is based on $1,530,000 1,000,000 pounds. Selling price per pound Production capacity Internal sales $4.75 1,000,000 pounds 100,000 pounds