McCann Company has two divisions, Division C and Division D.

McCann Company has two divisions, Division C and Division D. Division C manufactures Part C82 and sells it to Division D, and also sells the same part to the outside market for $50 per unit. Division C has capacity to make 400,000 units of C82 per year. The division’s fixed costs are $5,000,000 per year and its variable costs per unit are as follows:

Direct materials $20

Direct labor 12

Variable overhead 8

Part C82 is an essential component for Division D’s only product; the division sells 200,000 units per year at a price of $120 per unit. Division D’s fixed costs are $4,000,000 per year and its variable costs per unit, excluding the cost of Part C82, are as follows:

Direct materials $10

Direct labor 25

Variable overhead 10


Required

Suppose Division C’s demand for C82 from the outside market is currently 150,000 units per year. By how much will McCann’s income decrease if Division D purchases its desired 200,000 units of C82 at $50 per unit from the market rather than from Division C? What transfer price(s) would you suggest to induce both divisions to want Division D to purchase from Division C instead of from the market?


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