Walton Radio Corporation is a subsidiary of Salem Companies. Walton makes car radios that it sells to retail outlets. It purchases speakers for the radios from outside suppliers for $67 each. Recently, Salem acquired the Baird Speaker Corporation, which makes car radio speakers that it sells to manufacturers. Baird produces and sells approximately 180,000 speakers per year, which represents 70 percent of its operating capacity. At the present volume of activity, each speaker costs $60 to produce. This cost consists of a $44 variable cost component and an $16 fixed cost component. Baird sells the speakers for $71 each. The managers of Walton and Baird have been asked to consider using Bairds excess capacity to supply Walton with some of the speakers that it currently purchases from unrelated companies. Both managers are evaluated based on return on investment. Bairds manager suggests that the speakers be supplied at a transfer price of $71 each (the current selling price). On the other hand, Waltons manager suggests a $67 transfer price, noting that this amount covers total cost and provides Baird a healthy contribution margin.

Required

a. Based on market prices suggested by the managers, which transfer price would you recommend?