Weller Industries is a decentralized organization with sixdivisions. The company’s Electrical Division produces a variety ofelectrical items, including an X52 electrical fitting. TheElectrical Division (which is operating at capacity) sells thisfitting to its regular customers for $8.70 each; the fitting has avariable manufacturing cost of $4.80.

The company’s Brake Division has asked the Electrical Divisionto supply it with a large quantity of X52 fittings for only $6.70each. The Brake Division, which is operating at 50% of capacity,will put the fitting into a brake unit that it will produce andsell to a large commercial airline manufacturer. The cost of thebrake unit being built by the Brake Division follows:

Purchased parts (from outsidevendors)	$	23.80
Electrical fitting X52		6.70
Other variable costs		14.53
Fixed overhead andadministration		8.60
Total cost per brake unit	$	53.63

Although the $6.70 price for the X52 fitting represents asubstantial discount from the regular $8.70 price, the manager ofthe Brake Division believes the price concession is necessary ifhis division is to get the contract for the airplane brake units.He has heard “through the grapevine” that the airplane manufacturerplans to reject his bid if it is more than $55 per brake unit.Thus, if the Brake Division is forced to pay the regular $8.70price for the X52 fitting, it will either not get the contract orit will suffer a substantial loss at a time when it is alreadyoperating at only 50% of capacity. The manager of the BrakeDivision argues that the price concession is imperative to thewell-being of both his division and the company as a whole.

Weller Industries uses return on investment (ROI) to measuredivisional performance.

Required:

1. Assume that you are the manager of the ElectricalDivision.

a. What is the lowest acceptable transfer price for theElectrical Division?

b. Would you supply the X52 fitting to the Brake Division for$6.70 each as requested?

2. Calculate the net positive effect on the company's profit perbrake unit the Electrical Division to supply the fittings to theBrake Division and if the airplane brakes can be sold for $55?

3. In principle, within what range would that transfer pricelie?