Effects of transfer price choices McCann Company has two divisions, Division C and Division D. Division C manufactures Part C82 and sells it to Division D, and also sells the same part to the outside market for $50 per unit. Division C has capacity to make 400,000 units of C82 per year. The division’s fixed costs are $5,000,000 per year and its variable costs per unit are as follows:
Direct materials
$20
Direct labor
12
Variable overhead
8
Part C82 is an essential component for Division D’s only product; the division sells 200,000 units per year at a price of $120 per unit. Division D’s fixed costs are $4,000,000 per year and its variable costs per unit, excluding the cost of Part C82, are as follows:
$10
25
10
Required
Suppose Division C’s demand for C82 from the outside market is currently 150,000 units per year. By how much will McCann’s income decrease if Division D purchases its desired 200,000 units of C82 at $50 per unit from the market rather than from Division C? What transfer price(s) would you suggest to induce both divisions to want Division D to purchase from Division C instead of from the market?
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