The Fabricating division makes a component part that the Assembly division needs for a new product. The Fabricating division's variable cost of manufacturing the component is $20 per unit. The component is also available on the open market at a price of $50 per unit. The Assembly division needs 900 units per year, and the Fabricating division has excess capacity of 1,000 units.
a. Calculate the cost-based transfer price that the Fabricating division should charge the Assembly division.
b. Calculate the market-based transfer price that the Fabricating division should charge the Assembly division.
c. What arguments would the Fabricating division's manager and the Assembly division's manager make in an attempt to get the price each wants?