Lockhart Industries, Inc., is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems divisions. 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 Semiconductors Division is presently producing 1,200 units out of a total capacity of 1,500 units. Materials used in producing the Navigational Systems Division€™s product are currently purchased from outside suppliers at a price of $1,080 per unit. The Semiconductors Division is able to produce the components used by the Navigational Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

1.  Would the market price of $1,080 per unit be an appropriate transfer price for Lockhart Industries, Inc.? Explain.
2.  If the Navigational Systems Division purchases 300 units from the Semiconductors Division, rather than externally, at a negotiated transfer price of $775 per unit, how much would the income from operations of each division and total company income from operations increase?
3. Prepare condensed divisional income statements for Lockhart Industries, Inc., based on the data in part (2).
4.  If a transfer price of $850 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase?
5. 

a.  What is the range of possible negotiated transfer prices that would be acceptable for Lockhart Industries, 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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Lockhart Industries, Inc. Divisional Income Statements For the Year Ended December 31, 2012 Navigational Systems Division Semiconductors Division Total Sales: $990 per unit 1,200 units @ $1,188,000 $1,188,000 $2,790,000 1,875 units @ $1,488 per unit 2,790,000 $1,188,000 $2,790,000 $3,978,000 Expenses: Variable: $ 698,400 $ 698,400 1,200 units @ $582 per unit 1,875 units @ $1,170* per unit $2,193,750 2,193,750 Fixed 366,000 $1,064,400 477,000 $2,670,750 $ 119,250 843,000 $3,735,150 Total expenses Income from operations $ 123,600 $ 242,850 *$1,080 of the $1,170 per unit represents materials costs, and the remaining $90 per unit represents other variable conversion expenses incurred within the Navigational Systems Division.