Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of its product. Variable cost per widget is $0.75; full cost is $1.00. Com-parable widgets sell on the open market for $1.50 each. Division A can produce up to 2 million widgets per year but is currently operating at only 50 percent capacity. Division B expects to use 100,000 widgets in the current year.

Required:

1. Determine the minimum and maximum transfer prices.

2. Calculate Tulip Company’s total benefit of having the widgets transferred between these divisions.

3. If the transfer price is set at $0.75 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market.

4. If the transfer price is set at $1.50 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market.

5. What transfer price would you recommend to split the difference?