Transfer pricing and fixed cost per unit The Graca Division of Pryor Company currently produces electric fans that desktop computer manufacturers use as cooling components. The Hackney Division, which makes notebook computers, has asked the Graca Division to design and supply 20,000 fans per year for its notebook computers. Hackney currently purchases notebook fans from an outside vendor at the price of $18 each. However, Hackney is not happy with the vendor's unstable delivery pattern. To accept Hackney's order, Graca would have to purchase additional equipment and modify its plant layout. The additional equipment would enable the company to add 35,000 notebook fans to its annual production. Graca's avoidable cost of making 20,000 notebook fans follows:

Required
a. What would be the financial consequence to Pryor Company if the Graca Division makes the notebook fans and sells them to the Hackney Division? What range of transfer prices would increase the financial performance of both divisions?
b. Suppose the Hackney Division increases production so that it could use 35,000 Graca Division notebook fans. How would the change in volume affect the range of transfer prices that would financially benefit both divisions?

Costs Total Per Unit Variable costs Fixed cost $120,000 $6 $140,000