Carnover, Inc., manufactures a broad line of industrial and consumer products. One of its plants is located in Madrid, Spain, and another in Singapore. The Madrid plant is operating at 85 percent capacity. Its main product, electric motors, has experienced softness in the market, which has led to predictions of further softening of the market and predictions of a decline in production to 65 percent capacity. If that happens, workers will have to be laid off and one wing of the factory closed. The Singapore plant manufactures heavy-duty industrial mixers that use the motors manufactured by the Madrid plant as an integral component. Demand for the mixers is strong. Price and cost information for the mixers are as follows:

Price ...........$2,200

Direct materials ...... 630

Direct labor ....... 125

Variable overhead ...... 250

Fixed overhead ....... 100

Fixed overhead is based on an annual budgeted amount of $3,500,000 and budgeted production of 35,000 mixers. The direct materials cost includes the cost of the motor at $200 (market price). The Madrid plant capacity is 20,000 motors per year. Cost data are as follows:

Direct materials ...... $ 75

Direct labor ....... 60

Variable overhead ...... 60

Fixed overhead ...... 100

Required:

1. What is the maximum transfer price the Singapore plant would accept?

2. What is the minimum transfer price the Madrid plant would accept?

3. Consider the following environmental factors:

Madrid Plant                                                         Singapore Plant

Full employment is very important.                Cheap labor is plentiful.

Local government prohibits layoffs

without permission (which is rarely

granted).

Accounting is legalistic and conservative,        Accounting is based on British-

designed to ensure compliance with                American model, oriented toward

government objectives.                                    decision-making needs of creditors and

                                                                            investors.

How might these environmental factors affect the transfer pricing decision?