Based on Childs Manufacturing’s data in Exercise 14-17, assume that a transfer price of $11 has been established and that 75,000 units of materials are transferred, with no reduction in the Electronic Division’s current sales.

a. How much would Childs Manufacturing’s total operating income increase?

b. How much would the Appliance Division’s operating income increase?

c. How much would the Electronic Division’s operating income increase?

d. If the negotiated price approach is used, what would be the range of acceptable transfer prices and why?

Exercise 14-17

Wiring used by the Appliance Division of Childs Manufacturing is currently purchased from outside suppliers at a cost of $12.50 per unit. However, the same materials are available from the Electronic Division. The Electronic Division has unused capacity and can produce the materials needed by the Appliance Division at a variable cost of $10 per unit.