2) A company has two divisions, Division A and Division B. Division A manufactures products for both outside market as well as for Division B. The manager of Division B has expressed that transfer price of Division A is too high.
Division A has been selling 40000 units to outsiders and 10000 units to Division B, all at $20 per unit. The variable cost is $12 per unit and fixed costs at $200,000. Division B is asking for a transfer price of $18 per unit. If Division A does not sell to Division B, fixed costs of $ 30000 and assets of $175000 can be avoided. The firms existing assets are worth $ 800,000.
Division A is judging based on ROI.
c) Should Division A transfer its products at $18 to Division B?
d) What is the lowest price that Division A should accept?