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The Papers division of Forsythe Industries manufactures cardboard, which it transfers to the Box division, which uses the cardboard to make boxes. It costs $0.02 per square foot to make the cardboard (plus fixed costs, which are $30,000 per year for the Papers division), which sells for $0.05 per square foot on the market. The Box division uses 32 square feet to make a box, which costs an additional $0.10 per box to manufacture (plus fixed costs, which are $20,000 per year for the Box division). Boxes are sold for $2.50 each. The Papers division has the capacity to produce 2,000,000 square feet of cardboard a year, which is sufficient to fill the needs of both the Box division and the external market. The Box division sells 50,000 boxes per year. Both divisions are located in the same tax jurisdiction. Calculate the transfer price if it is based on a. Variable cost with a 10% markup b. Full cost with a 10% markup c. Market price d. Which of the prices calculated above would the company as a whole most prefer? e. What range would the transfer price fall into if it were negotiated between the two divisions?
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