Problem: SportCo, Inc. is a multidivisional company that produces and sells athletic equipment. Division 1 produces components for a variety of products, while Division 2 assembles the components and packages the finished product. Both divisions are free to buy and sell internally or externally. For a particular soccer ball, the cost structure within Division 1 and market price are as follows:
Variable cost $4
Fixed cost 2
Market price 10
a. Assuming Division 1 is not operating at capacity, calculate the minimum acceptable transfer price.
b. Assuming Division 1 is operating at capacity, calculate the transfer price.
c. Explain why capacity is a factor in the transfer pricing decision.