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Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of
Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of its product. Variable cost per widget is $1.75; full cost is $3.00. Comparable widgets sell on the open market for $3.70 each. Division A can produce up to 3.40 million widgets per year but is currently operating at only 50 percent capacity. Division B expects to use 170,000 widgets in the current year. Required: 1. Determine the minimum and maximum transfer prices. 2. Calculate Tulip Company's total benefit of having the widgets transferred between these divisions. 3. If the transfer price is set at $1.75 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. 4. If the transfer price is set at $3.70 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. 5. What transfer price would you recommend to split the difference?
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