Allied Instrument Company is a diversified aerospace company, with two operating divisions, Electronics and Instruments Divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

The Electronics Division is presently producing 800 units out of a total capacity of 1,000 units. Materials used in producing the Instruments Division€™s product are currently purchased from outside suppliers at a price of $1,650 per unit. The Electronics Division is able to produce the components used by the Instruments Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Instructions
1. Would the market price of $1,650 per unit be an appropriate transfer price for Allied Instrument Company? Explain.
2. If the Instruments Division purchases 200 units from the Electronics Division, rather than externally, at a negotiated transfer price of $1,450 per unit, how much would the income from operations of each division and total company income from operations increase?
3. Prepare condensed divisional income statements for Allied Instrument Company, based on the data in (2).
4. If a transfer price of $1,100 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase?
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Allied Instrument Company?
b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transferprice?

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Allied Instrument Company Divisional Income Statements For the Year Ended December 31, 2006 Electronics Division Instruments Division Total Sales: 800 units x $1,650 per unit 1,250 unitsx $2,480 per unit 1,320,000 3,100,000 $4,420,000 $1,320,000 3,100,000 Expenses: Variable 800 units x $970 per unit 776,000 $ 776,000 2,437,500 562,000 3,775,500 344,500644,500 1,250 unitsx $1,950 per unit Fixed Total expenses Income from operations 244,000 $1,020,000 S 300,000 $2,437,500 318,000 $2,755,500 $1,650 of the $1,950 per unit represents materials costs, and the remaining $300 per unit represents other variable conversion expenses incurred within the Instruments Division.