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Branded Shoe Company manufactures only one type of shoe and has two divisions: Assembly and Finishing. The Assembly Division manufactures shoes for the Finishing Division. After completing the pair of shoes Finishing sells them externally to retailer shoe stores for a price of $100 per pair of shoes. The Assembly Division transfers all shoes internally to Finishing. If Assembly were to sell externally, the price is $42 per pair.

Assembly's costs per pair:
Direct materials	$ 10
Direct labor	$ 8
Variable overhead	$ 7
Division fixed costs	$ 5

Finishing's costs per pair:
Direct materials	$ 14
Direct labor	$ 6
Variable overhead	$ 4
Division fixed costs	$ 16

Calculate and compare the difference in Branded Shoe Companys Operating Income between Transfer Price Scenarios A and B if the Assembly Division sells 100,000 pairs of to the Finishing Division.

Scenario A: Negotiated transfer price of $34 per pair

Scenario B: Market-based transfer price per pair

Multiple Choice

• $800,000 more operating income under Scenario B.

• $800,000 more operating income under Scenario A.

• $80,000 more operating income under Scenario A.

• The operating income is the same under both scenarios.

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