Reference no: EM132784246

Nogo Motors, Inc., has several divisions that often purchase component parts from each other. The company is fully decentralized and each divisions on where to buy and sell in conformity with divisional goals. Igo Division purchases most of its airbags from Letgo Division. The managers of these two divisions are currently negotiation a transfer price for the airbags for next year, when the airbag will be standard equipment on all Igo vehicles.

Letgo Division prepared the following financial information for negotiating purposes:

Cost of airbag as manufactured by Letgo:

Direct materials costs P 40

Direct manufacturing labor costs 55

Variable manufacturing overhead costs 10

Fixed manufacturing overhead costs 25

Variable marketing costs 5

Fixed marketing costs 15

Fixed administrative costs 10

Total costs P 160

Required: Consider each of the requirements independently.

Question 1: If Letgo Division desires to achieve it's operating income goal of 20% of sales.. What should be the transfer price?

Question 2: Assume that Letgo Division wants to maximize its operating income. What transfer price would you recommend that the Letgo Division negotiated?

Question 3: What is the transfer price that you believe Letgo Division should charge if overall company-operating income is to be maximized?