High Sound Corporation manufactures car stereos. It is a division of Quality Motors, which manufactures vehicles. High Sound sells car stereos to Quality Motors, as well as to other vehicle manufacturers and retail stores. The following information is available for High Sound's standard unit car stereo's costs: variable cost per unit $35; fixed cost per unit $23; and selling price to outside customers $86. Quality Motors currently purchases a standard unit car stereo from an outside supplier for $80. Because of quality concerns and to ensure a reliable supply, the top management of Quality Motors has ordered High Sound to provide 20,000 units per year at a transfer price of $35 per unit. High Sound is already operating at full capacity. High Sound can avoid $5 per unit of variable costs by selling the unit internally.
Instructions
(a) Determine the minimum transfer price that High Sound should accept.
(b) Calculate the potential loss to the corporation as a whole because of this forced transfer price of $35.
(c) How should the company resolve this situation?