The Bat Division of Baseball Company has just revised its actual cost data for 2014. Bat Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for $122 each and sell at $135. Bat’s new cost data are as follows (in $) (10 m)

Direct materials                                                           40                    

Direct labor                                                                 30        

Variable overhead                                                       10        

Fixed overhead                                                           16        

Variable selling expenses                                            6        

Fixed selling and administrative expenses                       12

Total costs                                                                  114      

Desired return                                                           20

Sales price                                                                  134

Current production is 200,000 units, and the Bat Division has a capacity of 300,000 units.

Required:

a) What is the lowest price the Bat Division should charge for the internal transfers of its goods? What is the highest price the Sport Division should pay for the units?

b) Should the Bat division agree for an internal transfer price of $90? If yes, what would be the contribution for both the Divisions and profit for Baseball Company as a whole?

c) If the Bat division operates at full capacity what should be the sales price, if the mark-up has to be 20%.

d) Give the primary reason why the Bat Division should reduce its price.