Ryan manages a small plant that supplies containers to his firm's paint division. He only produces what is ordered by the paint division and currently supplies 900,000 cans per month. His total monthly variable and fixed costs are $450,000 and $1,080,000, respectively. The market price is $1.50 per can.
Required
a. What is the profit in Ryan's plant if the transfer price were set at the market price?
b. Using 110% of full cost as the transfer price, what is the profit in Ryan's plant?
c. What is the impact on the firm's profit if it switches from a market-based transfer price to a cost-based transfer price? Ignore tax considerations and assume that volume is unaffected.