Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 per unit. However, the same materials are available with Division 6. Division 6 has unused capacity of 40,000 units and can produce the materials needed by Division 3 with the following costs per unit:

Direct materials $1.25

Direct labor $0.90

Variable overhead $0.85

Fixed overhead $0.60

1. What is the minimum transfer price per unit? Which division will set the minimum transfer price?
2. What is the maximum transfer price per unit? Which division will set the maximum transfer price?
3. Suppose the two divisions negotiate a transfer price of $3.75 per unit for 40,000 units. By how much will each division's income increase or decrease as a result of this transfer?

Division 3 increase or decrease? How much?

Division 6 increase or decrease? How much?