Pomme Corporation Has a Motor Division That Does Work for Other

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The Answer is (Note: Due to limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )
a.From the perspective of the Motors Division,profits would increase as a result of the transfer if,and only if:
Transfer price > Variable cost + Opportunity cost.
The opportunity cost is the contribution margin on the lost sales,divided by the number of units transferred:
Opportunity cost = [($34.00 per unit - $22.00 per unit - $4.00 per unit)× 1,000 units*]/2,000 units = $4.00 per unit.
*10% × 10,000 units = 1,000 units.
Therefore,Transfer price > ($17.00 per unit + $0.50 per unit)+ $4.00 per unit = $21.50 per unit.
From the viewpoint of the Equipment Division,the transfer price must be less than the cost of buying the units from the outside supplier.Therefore,Transfer price < $28.00.
Combining the two requirements,we get the following range of transfer prices: $21.50 < Transfer price < $28.00.
b.Yes,the transfer should take place.From the viewpoint of the entire company,the cost of transferring the units within the company is $21.50,but the cost of purchasing the special parts from the outside supplier is $28.00.Therefore,the company's profits increase on average by $6.50 for each of the special motors that is transferred within the company,even though this would cut into production and sales of another product.

Pomme Corporation Has a Motor Division That Does Work for Other

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