Question

The Pro Company is? decentralized, and divisions are considered investment centers. Watkins specializes in sports? equipment, and one division manufactures netting that is used for basketball? hoops, soccer? goals, and other sports equipment. The Netting Division reports the following information for a? heavy-duty basketball hoop? net:

The Basketball Equipment Division can purchase a similar? heavy-duty net from an outside vendor for? $15

Sales Price per Unit	$18
Variable Cost per Unit	6
Contribution Margin per Unit	$12

Requirements

1.	Determine the negotiable range for the transfer price.
2.	What is the minimum transfer price the Netting Division should consider if operating at? capacity? Below? capacity?
3.	What is the maximum transfer price the Basketball Equipment Division should? consider?

Answer 1

1. Netting decision incur variable cost of 6 for manufacturing. So minimum transfer price for netting decision is 6. Basketball decision can buy from outside at 15. So maximum transfer price that it can pay is 15. So negotiable range is $6-$15.

2. If netting devision is operating at capacity it means it has no spare capacity. So for transferring units to basketball devision it has to reduce its sell to outside. So now transfer price in this case will be cost incurred + benefits lost i.e 6+12=18

Operating below capacity means it has spare capacity. So now it can manufacture transfer units along with outside orders. Now transfer price will be only cost incurred. So transfer price=6

3. Maximum transfer price that basketball devision shall consider is 15 at which it can purchase from outside.