Hinton Corporation Includes Two Divisions,Filter Division and Motor Division

question 108

Essay

Hinton Corporation includes two divisions,Filter Division and Motor Division.The Filter Division makes specialized filters,including one that could be used by the Motor Division.Costs for the filter are variable costs,$16; fixed costs,$20.Filter Division has capacity to make 20,000 of the filters,and it is operating at capacity.It sells the filters to other companies for $52 each.The Motor Division needs 8,000 filters per year,and it has been purchasing them from another company for $45 each.
Required:
1)Businesses traditionally have used different bases for establishing transfer prices.What basis should be used in this case?
2)If a transfer were to occur between Filter Division and Motor Division,what is the maximum that Motor Division should be willing to pay for the filters?
3)If a transfer were to occur between Filter Division and Motor Division,what is the minimum price that Filter Division should be willing to accept?
4)Do you recommend that a transfer occur between Filter Division and Motor Division? If the transfer did occur,what would be the effect on the overall profits of Hinton Corporation?

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