Division X makes a component that it sells externally for $54 and can also sell internally to Division Z. The variable cost associated with producing one unit = $30. Division Z currently buys all of its 10,000 units in the external market at the cost of $50 per unit.
REQUIRED:
a. Calculate the floor and ceiling transfer prices if Division X is currently producing and selling at its full capacity of 100,000 units. Should the transfer be made? If the transfer is made, what is the effect on total company NOI?
b. Calculate the floor and ceiling transfer prices if Division X has 12,000 units of excess capacity. Should the transfer be made? If the transfer is made, what is the effect on total company NOI?