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Venetian Corporation manufactures car stereos. It is a division of Berna Motors,
which manufactures vehicles. Venetian sells car stereos to Berna, as well as to other vehicle
manufacturers and retail stores. The following information is available for Venetian’s standard
unit: variable cost per unit $35; fixed cost per unit $23; and selling price to outside customer
$86. Berna currently purchases a standard unit from an outside supplier for $80.
Because of quality concerns and to ensure a reliable supply, the top management of Berna
has ordered Venetian to provide 200,000 units per year at a transfer price of $35 per unit.
Venetian is already operating at full capacity. Venetian can avoid $4 per unit of variable
selling costs by selling the unit internally.

Answer each of the following questions.
(a) What is the minimum transfer price that Venetian should accept?
(b) What is the potential loss to the corporation as a whole resulting from this forced transfer?

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