Division B has asked Division A of the same company to supply it with 4,000 units of part K932 this year to use in one of its products. Division B has received a bid from an outside supplier for the parts at a price of $31.00 per unit. Division A has the capacity to produce 10,000 units of part K932 per year. Division A expects to sell 8,000 units of part K932 to outside customers this year at a price of $36.00 per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A produces part K932 at a variable cost of $18.00 per unit. In addition, the cost of packing and shipping the parts for outside customers is $3.00 per unit. These packing and shipping costs would not have been incurred on sales of the parts to Division B. What is the range of transfer prices within which both the Divisions’ profits would increase as a result of agreeing to the transfer of 4,000 parts from Division A to Division B? How much would profits change this year for the overall company if this transfer took place?
Range of transfer prices
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