Teslum Inc. has a number of divisions, including the Machina Division, a producer of high-end espresso makers, and the Java Division, a chain of coffee shops.
Machina Division produces the EXP-100 model espresso maker that can be used by Java Division to create various coffee drinks. The market price of the EXP-100 model is $950, and the full cost of the EXP-100 model is $475. Required:
1. If Teslum has a transfer pricing policy that requires transfer at full cost, what will the transfer price be?
2. If Teslum has a transfer pricing policy that requires transfer at market price, what would the transfer price be?
3. Now suppose that Teslum allows negotiated transfer pricing and that Machina Division can avoid $135 of selling expense by selling to Java Division.
What is the minimum transfer price?
What is the maximum transfer price?
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