Giga-Stuff, Inc Sophistosand Has the Capacity to Make 400,000 Units of Component

Multiple Choice

Giga-Stuff, Inc.Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X: $$\begin{array} { l l } \text { Direct materials } & \$ 0.30 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.70 \\\text { Fixed overhead } & \underline { 1.00 } \\\text { Total } & \underline { \$ 2.15 }\end{array}$$ Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives) .
-Refer to Giga-Stuff, Inc. Assume the company allows negotiated transfer pricing. What is the floor of the bargaining range, and which division sets it?

A) $1.15; Videostuff
B) $2.15; Videostuff
C) $1.15; Sophistosand
D) $2.15; Sophistosand