Reference no: EM132515676

TAA, a telecommunications corporation, has two completely independent profit centers considering a transfer, TAA will not dictate transfers or impose a transfer pricing policy on the divisions. .

• One of TAA's divisions; Southwestern Ringer, produces telephone sets that it sells for $30 each. The standard absorptive manufacturing cost is $24, which includes $6 per unit fixed overhead. Fixed overhead is allocated over its annual sales forecast of 50,000 telephone sets. Maximum production capacity is 75,000, sets annually.

• Another division, Northeastern Tell, can use the telephone sets in an answering machine telephone-radio product it markets. As an alternative to buying telephone sets from Southwestern, Northeastern can enter into a contract for the 20,000 sets needed a Mexican company, OLA, Inc. OLA has quoted a price of $25 per set for the same quality telephone. To produce the phone Southern will incur additional cost of $2.5 per

Question a. Determine whether a transfer should take place between Southwestern Ringer and Northeastern Tell at current levels. What range of prices for a transfer if it is to occur?

Question b. Should a transfer occur if Southwestern can increase sales and production volumes to 60,000 sets annually by dropping the sales price to $27.50? What is the range of prices if a transfer should occur?