One of the Divisions of Phoenix Corporation Is the Motor

Essay

One of the divisions of Phoenix Corporation is the Motor Division.This division currently is designing a new energy-efficient motor that would require a specialized filter.An outside company has offered to provide the 40,000 filters needed each year at $12.50 each.Phoenix is considering setting up a separate division,the Filter Division,to make the filters.The variable cost per unit would be $4,and total fixed costs incurred by the Filter Division would be $240,000.
Required:
1)If the Filter Division is established,Phoenix would need to determine the basis (market-based or other basis)to use in setting the transfer price.What basis would you recommend in this case?
2)What is the maximum transfer price that the Motor Division should be willing to pay for the filters?
3)What is the minimum transfer price that Filter Division should be willing to accept for the filters?
4)Should the transfer be made? What effect would the transfer have on the profits of Phoenix Corporation?