Underwood Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Underwood uses full (or absorption) cost as its base, the transfer price charged to its Retail Division should be:

$14.25.

$12.00.

$10.75.

$8.50 plus a markup.

negotiated between the managers of the Processing and Retail Divisions.