Lou Company records reveal the following:

\begin{array}{lr}\text { Division } \mathrm{X}\\\text { Market price of finished component to outsiders } & \$ 32 \\\text { Variable costs per component } & \underline{24} \\\text { Contribution margin per component } & \underline{\$ 8} \\\text { Total contribution for } 20,000 \text { components } & \$ 160,000\end{array}

\begin{array}{ll}\text { Division Y }\\\text {Sales price of finished product Variable costs: } & &&\$42 \\\text {Division X 1 component @ \$24) } & \\\text {Division Y } & &\$24 \\\text { Assembly} & \$9 \\\text { Packaging} & 4&13&-37 \\\text {Contribution margin per unit } & &&\$5 \\\text {Total contribution for 20,000 units } & &&\$100,000 \\\end{array}

The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier.If Division X wants to transfer the components to Division Y for $34 each, the manager of Division Y would _____.
A)not want to buy from Division X, as the same component could be purchased at the market price of $32
B)buy from Division X, as this would be in the best interest of the company as a whole
C)buy from Division X as long as Division X could supply a large enough quantity to make it profitable to Division Y
D)probably ask Division X's manager to split the difference between the $34 and the market price of $32 to arrive at a transfer price of $36

One Reason Companies Use Full-Cost Transfer Pricing Is That It

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