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TRANSFER PRICE EXAMPLL Star Company has two divisions; A and B. Division A produces electric motors, 20,000 of which are sold to Division B and the remainder are sold to outside customers. Star treats its divisions as profit centers and allows division mangers to choose their sources of supply and to whom they sell. Corporate policy requires variable cost be used as the transfer price for all interdivisional sales and purchases. Division A's estimated revenues and costs for the o Division A has an opportunity to sell the 20,000 motors to an external customer at a price of $75 per unit on a continuing basis beginning next year. Division B can purchase its requirement of 20,000 motors from an external supplier at a price of $85 per unit. a. Compute the increase/decrease in Division A's operating income if Division A discontinues the sales to Division B and adds the new customer for the coming year. Assume A's fixed costs are unavoidable. b. Instead of using variable cost as the transfer price, assume Star permits the division managers to negotiate the transfer price for next year. The mangers agree on a transfer price: $75 per unit minus an equal sharing between the divisions of the additional operating income earned by A from selling B the 20,000 motors at $75 per unit. Compute the transfer price for next year