Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow:
| |
Manufacturing |
Marketing |
| Capacity (units) |
|
1,160,000 |
|
|
516,000 |
|
| Sales pricea |
$ |
2,200 |
|
$ |
5,350 |
|
| Variable costsb |
$ |
720 |
|
$ |
2,000 |
|
| Fixed costs |
$ |
11,600,000 |
|
$ |
7,360,000 |
|
a For Manufacturing, this is the price to third parties.
b For Marketing, this does not include the transfer price paid to Manufacturing.
Required:
a. Current production levels in Manufacturing are 616,000 units. Marketing requests an additional 116,000 units to produce a special order. What transfer price would you recommend?
b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?