Birrell Scientific Inc. manufactures electronic products, with two operating divisions, GPS Systems and Communication Systems. 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 GPS Systems Division is presently producing 400,000 units out of a total capacity of 550,000 units. Materials used in producing the Communication Systems Division's product are currently purchased from outside suppliers at a price of $70 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division at a variable cost of $50 per unit. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.
Instructions
1. Would the market price of $70 per unit be an appropriate transfer price for Birrell Scientific Inc.? Explain.
2. If the Communication Systems Division purchases 100,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $58 per unit, how much would the operating income of each division and the total company operating income increase?
3. Prepare condensed divisional income statements for Birrell Scientific Inc. based on the data in part (2).
4. If a transfer price of $64 per unit is negotiated, how much would the operating income of each division and the total company operating income increase?
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Birrell Scientific Inc.?
b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price?

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BIRRELL SCIENTIFIC INC. Divisional Income Statements For the Year Ended July 31, 20YS GPS Systems Division Communication Systems Division Total Sales: 28,800,000 400,000 units@ $72 per unit 100,000 units@ $132 per unit 13,200,000 13,200,000 $28,800,000 13,200,000 42,000,000 $ 28,800,000 Expenses: Variable: 400,000 units@ $50 per unit $(20,000,000) $(20,000,000) 100,000 units@ $110* per unit Fixed Total expenses (11,000,000) (1,000,000) S(12,000,000) 1,200,000 11,000,000) $(25,000,000 3,800,000 $(37,000 Operating income 5,000,000 $70 of the $110 per unit represents materials costs, and the remaining $40 per unit represents other variable conversion expenses incurred within the Communication Systems Division.