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E8-16 Crede Inc. has two divisions. Division A makes and sells student desks. Division B

manufactures and sells reading lamps.

Each desk has a reading lamp as one of its components. Division A can purchase reading

lamps at a cost of $10 from an outside vendor. Division A needs 10,000 lamps for the

coming year.

Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers

are estimated at 40,000 lamps for the next year. Reading lamps are sold at $12 each.

Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred

if lamps are sold internally to Division A. The total amount of fixed costs for Division B is

$80,000.

Instructions

Consider the following independent situations.

(a) What should be the minimum transfer price accepted by Division B for the 10,000

lamps and the maximum transfer price paid by Division A?

(b) Suppose Division B could use the excess capacity to produce and sell externally 15,000

units of a new product at a price of $7 per unit. The variable cost for this new product is

$5 per unit. What should be the minimum transfer price accepted by Division B for the

10,000 lamps and the maximum transfer price paid by Division A?

(c) If Division A needs 15,000 lamps instead of 10,000 during the next year, what should

be the minimum transfer price accepted by Division B and the maximum transfer

price paid by Division A?

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