Transfer Price
Sell Division makes part JS13 with the following characteristics:
Production capacity
45,000 units
Selling price of JS13 to outside customers
$120 per unit
Variable cost
$67 per unit
Fixed cost
$15 per unit, at capacity
Total fixed costs
$675,000
Buy Division, another division of the same company, wants to purchase 15,000 units of part OC53 each period from Sell Division. Parts JS13 and OC53 have the same variable cost per unit for Sell Division. Producing Part OC53 will not
change Sell Division's total fixed costs. Buy Division is now purchasing Part OC53 from an outside supplier at a price of $87 each. Hence, Buy Division won't pay more than $87 to Sell Division for the same product.
Suppose that Sell Division has ample idle capacity to handle all of Buy Division's needs for Part OC53 without any increase in fixed costs and without cutting into current sales to outside customers for Part JS13.
If Sell Division refuses to accept the $87 price to produce and sell Part OC53 to Buy Division,
what will be the impact on the company as a whole?
The company will be worse off, in total, by $
