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Rapid Industries has multiple divisions. One division, Iron Products, makes a component that another division,...

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Accounting

Rapid Industries has multiple divisions. One division, Iron Products, makes a component that another division, Austin, is currently purchasing on the open market. Iron Products currently has a capacity to produce 525,000 components at a variable cost of $7.50 and a full cost of $10.00. Iron Products has outside sales of 495,000 components at a price of $13.00 per unit. Austin currently purchases 40,000 units from an outside supplier at a price of $12.00 per unit. Assume that Austin desires to use a single supplier for its component.

Required:

  1. What will be the effect on Rapid Industries operating profit if the transfer is made internally? Assume the 40,000 units Austin needs are either purchased 100% internally or 100% externally.
  2. What is the minimum transfer price?
  3. What is the maximum transfer price?
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