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Transfer Pricing
Kitchenade Corporation's Gauge Division manufactures and sells product no. 24, which is used in refrigeration systems. Per-unit variable manufacturing and selling costs amount to $23 and $7, respectively. The Division can sell this item to external domestic customers for $40 or, alternatively, transfer the product to the company's Refrigeration Division. Refrigeration is currently purchasing a similar unit from Taiwan for $36. Assume use of the general transfer-pricing rule.
Required:
Question A. What is the most that the Refrigeration Division would be willing to pay the Gauge Division for one unit?
Question B. If Gauge had excess capacity, what transfer price would the Division's management set?
Question C. If Gauge had no excess capacity, what transfer price would the Division's management set?
Question D. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers by $5 per unit.
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