Henderson Company manufactures electronics. The Calculator Division (an investment center) manufactures handheld calculators. The division can purchase the batteries used in the calculators from the Battery Division (another investment center) or from an outside vendor. The cost to purchase batteries from the outside vendor is $5. The transfer price to purchase from the Battery Division is $6. The Battery Division also sells to outside customers. The sales price is $6, and the variable cost is $3. The Battery Division has excess capacity.
Requirements
1. Should the Calculator Division purchase from the Battery Division or the outside vendor?
2. If Henderson Company allows division managers to negotiate transfer prices, what is the maximum transfer price the manager of the Calculator Division should consider?
3. What is the minimum transfer price the manager of the Battery Division should consider?
4. Does your answer to Requirement 3 change if the Battery Division is operating at capacity?