Raja, a manager in Shalimar Paints, manages a plant that supplies containers to the firm's various paint divisions. While his practical capacity is 1.2 million cans per month, he only produces what is ordered by the paint divisions. Currently, he supplies 900,000 cans per month. His variable and fixed costs, respectively, are $450,000 and $1,080,000 per month. The market price is $1.50 per can. For strategic reasons, upper management has decided that Shalimar will not outsource container production.
Required:
a. Should Raja's plant be evaluated as a profit center or as a cost center?
b. Suppose Raja's plant is evaluated as a cost center. Should a full-cost transfer price be based on practical capacity or actual capacity used?
c. What transfer pricing scheme do you suggest?