Mountain Industries operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow:
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For Manufacturing, this is the price to third parties. For Assembly, this does not include the transfer price paid to Manufacturing.
Required :
a. Current production levels in Manufacturing are 100,000 units. Assembly requests an additional 20,000 units to produce a special order. What transfer price would you recommend? Why?
b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? Why?
c. Suppose Manufacturing is operating at 190,000 units. What transfer price would you recommend?Why?