The following information relates to a new computer chip that Hand Held has developed for its new cell phone that contains a personal organizer:

CHIP                                                                 DIVISION

Market price of finished chip to outsiders ..... $24

Variable cost per unit ......................................... 12

Contribution margin ......................................... $12

Total contribution for 30,000 units .........$360,000

CELL PHONE                                                     DIVISION

Market price of finished products ................... $128

Variable costs:

From Chip Division ............................................... 12

Other direct materials .......................................... 50

Cell Phone Division

Assembly ............................................................... 38

Packaging .............................................................. 20

Contribution margin ............................................ $8

Total contribution for 20,000 units ..........$160,000

The variable costs of the Cell Phone Division will be incurred whether it buys from the Chip Division or from an outside supplier.

REQUIRED

A. What is the highest price that the managers of the Cell Phone Division would want to pay the Chip Division for the chip? Explain.

B. If the Chip Division is working at full capacity and cannot produce additional units, what transfer price for the chip would be best for the company as a whole? Explain.

C. If the Chip Division is not operating at capacity and has no prospect of reaching capacity that is the lowest price its managers would typically be willing to sell chips to the Cell Phone Division?