Parker Packaging Company manufactures cardboard and packaging products, with two operating divisions, the Cardboard and Packaging 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 Cardboard Division is presently producing 10,000 cases out of a total capacity of 12,000 cases. Materials used in producing the Packaging Division’s product are currently purchased from outside suppliers at a price of $105 per case. The Cardboard Division is able to produce the materials used by the Packaging 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 $105 per case be an appropriate transfer price for Parker Packaging Company? Explain.
2. If the Packaging Division purchases 2,000 cases from the Cardboard Division, rather than externally, at a negotiated transfer price of $80 per case, how much would the income from operations of each division and the total company income from operations increase?
3. Prepare condensed divisional income statements for Parker Packaging Company, based on the data in (2).
4. If a transfer price of $100 per case is negotiated, how much would the income from operations of each division and the total company income from operations increase?
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Parker Packaging 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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Parker Packaging Company Divisional Income Statements For the Year Ended December 31, 2006 Cardboard Division Packaging Division Total Sales: 10,000 units × $105 per unit 15,000 units × $190 per unit 1,050,000 $1,050,000 2,850,000 $3,900,000 $2,850,000 Expenses: Variable 10,000 units x $72 per unit 15,000 units x $135* per unit 720,000 155,000 S175,000 $2,025,000 360,000 875,000 $2,385,000 465,000 720,000 2,025,000 515,000 $3,260,000 640,000 Fixed Total expenses Income from operations $105 of the 5135 per case represents materials costs, and the remaining $30 per case represents other variable conversion expenses incurred within the Packaging Division.