Question - Rapid Industries has multiple divisions. One division, Iron Products, makes a component that another division, Austin, is currently purchasing on the open market. Iron Products currently has a capacity to produce 505,000 components at a variable cost of $7.00 and a full cost of $10.00. Iron Products has outside sales of 461,000 components at a price of $14.50 per unit. Austin currently purchases 50,000 units from an outside supplier at a price of $11.00 per unit. Assume that Austin desires to use a single supplier for its component.
a. What will be the effect on Rapid Industries' operating profit if the transfer is made internally? Assume the 50,000 units Austin needs are either purchased 100% internally or 100% externally.
b. What is the minimum transfer price?
c. What is the maximum transfer price?