Until recently, Strike Ltd focused exclusively on making soles for work boots and

football boots. It sold these rubber soles to boot manufacturers. Last year the company

decided to take advantage of its strong reputation by expanding into the business of

making football boots. As a consequence of this expansion, the company is now

structured as two independent divisions, the Boot Division and the Sole Division.

The Sole Division continues to make rubber soles for both football boots and work boots

and sells these soles to other boot manufacturers. The Boot division manufactures leather

uppers for football boots and attaches these uppers to rubber soles. During its first year

the Boot Division purchased its rubber soles from outside suppliers so as not to disrupt

the operations of the Sole Division.

Strike management now wants the Sole Division to provide at least some of the soles

used by the Boot Division. The table below shows the contribution margin for each

division when the Boot

Division purchases from an outside supplier.

Boot

Division

Sole

Division

Selling Price of foot ball boots

$100

Selling

price

$28

Variable cost of making boots

45

VC for sun

21

Cost of sole purchased from outside

suppliers

25

Contribution Margin per unit

30

CM per unit

7

The information above indicates that the total contribution margin per unit is

$37 (30+7)

Required:

What would be a fair transfer price if the Sole Division sold 10,000 soles to the Boot

Division?

(a) Assuming that that the sole division has capacity for 80,000 units and can sell all it

produces

on the external market.

6

(b) Assuming that Sole Division can only sell 70,000 units externally.

(c)

Assuming that the sole division can only sell 75,000 units externally.