Question

Crain Corp. (Crain) is a large conglomerate company made up of several independent subsidiaries. All subsidiary managers have been told to manage their subsidiary as if it were a completely separate business from the other subsidiaries. The manager of the Tractor subsidiary (Tractor) wants to purchase its tractor engines from the Engine subsidiary (Engine). Tractor currently pays $3,500 per engine from an external supplier, and was also quoted the same price of $3,500 to purchase the engines from Engine instead. Tractor's manager was furious that a related subsidiary would NOT give Tractor a better deal. Crain's head office records contained the following information: Tractor subsidiary Annual number of engines required 4,500 Engine subsidiary Annual number of engines sold 18.500 Annual capacity 20.000 Variable cost per engine $ 2,000 Annual fixed costs $24,000,000 Engine would save approximately $100 in variable costs per engine (mostly sales and administrative costs) by selling its engines to Tractor since the engines transferred internally would NOT have to be packaged

Required: [PLEASE PROVIDE A TYPE WRITTEN ANSWER Not HAND WRITTEN (hard to read hand writing]

1)Calculate the minimum and maximum transfer prices between Tractor and Engine for the engines

2) Assume that Tractor and Engine agree on a transfer price of $3,350. Calculate the total incremental benefit to each of Tractor and Engine

Answer 1