Transfer pricing-minimum and maximum

Reference no: EM1364141

Division A of Hoover Inc. transfers its product to Division B. Division B can either buy the item internally or externally (cost = $75 each). Division A has just completed its annual cost update as follows:

Direct material $25.00
Direct labor 18.75
Variable manufacturing overhead 6.25
Fixed manufacturing overhead 5.00
Variable selling expenses 3.75
Fixed selling and administrative expenses 7.50

Total costs $66.25
Desired return 13.75
Sales price $80.00

Division A is operating at 80 percent of its 500,000 unit capacity.

Required:

1) What is the minimum transfer price Division A should charge for internal transfers?

2) What is the maximum price Division B would be willing to pay?

3) Why should Division A reduce its price to Division B?

Reference no: EM1364141

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