$12\mathrm{.}58$ Transfer pricing $($LO$5,$ Appendix$).$ Quest Computers, Inc., makes

microprocessor chips and personal computers. Its Microprocessor Division makes the

chips and supplies them to the Personal Computer Division. The Personal Computer buys

all the other necessary parts from outside vendors and assembles personal computers for

home and business use. There is also a ready outside market for microprocessor chips

made by the Microprocessor Division. The following cost and market data pertains to the

two divisions:

Average estimated selling price for the personal computer $$1,000$

Market price for the microprocessor chip $($per unit$)$ $$250$

Variable costs in Personal Computer Division $($excluding chip$)$ $$820$

Variable costs for making the chip $$100$

The two divisions are profit centers. While Quest Computers, Inc., would not like its

Microprocessor division to sell the advanced microprocessor chip to other computer

manufacturers in the outside market, it nevertheless allows its divisional managers

complete latitude in decision making. The manager of the Microprocessor Division

prefers to charge the Personal Computer Division the market price for transferring the

chips. The manager of the Personal Computer Division makes the following calculations:

Selling price$$final product $$1,000$

Transferred$-$in costs $($market$)$ $$250$

Variable costs for completion $$820$ $$1,070$

Contribution $($loss$)$ on product $$(70)$

Required:

a$.$ From the point of view of Quest Computers, should transfers be made to the Personal

Computer Division if there is no excess capacity in the Microprocessor Division? Is the

market price the correct transfer price?

b$.$ Assume that the Microprocessor Division has the capacity to make $50,000$ chips, and it

can sell only $37,500$ chips to the outside market at a price of $$250($assume for various

reasons, the division is not willing to reduce this price$).$ From the point of view of Quest

Computers, should the remaining $12,500$ chips be transferred to the Personal Computer

Division?

c$.$ Suppose the Microprocessor Division can sell all $50,000$ chips if it reduces the market

price to $$225.$ From the point of view of Quest Computers, should transfers be made to

the Personal Computer Division? If yes, is market price the correct transfer price?