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Question - Texas Corporation has two profit-center divisions, ABC in Albany and XYZ in Boston. ABC is operating at full capacity; it currently makes a part that it sells to both outside local buyers in the Albany area, as well as to XYZ. Due to differing state laws, the price for the part in the open market is $25.00 in Albany and $23.00 in Boston. Thus, ABC sells to the outside market for $25.00 and if XYZ were to source the part from the local suppliers in Boston, it would have to pay $23.00. The transfer price for the part is currently set at $24.00, the average of the prices in the Boston and Albany areas. ABC wants to raise the transfer price to $25.00; XYZ wants the transfer price to go down to $23.00.
Other data & information: the variable cost of production per part to ABC is $18.00, the fixed costs are $30,000 and ABC is currently selling 10,000 units total (its full capacity). If XYZ were to stop buying from ABC, ABC would not be able to replace those sales with sales to outside customers. From the perspective of Texas Corporation (assume that the transfer price is based completely on what would make economic sense for Texas Corp, and is not influenced by negotiations): What is the appropriate transfer price of the part?
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