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The Bad Man Wagon (BMW) Company is a fully integrated automotive maker.

The Bad Man Wagon (BMW) Company is a fully integrated automotive maker. To meet unexpected demand its Assembly Division makes an offer to purchase 90,000 batteries from Electrical Div @ $104 per battery. The cost for producing the batteries by the electrical division is a follows:

  • Direct Material             $40
  • Direct Labour              $20
  • Variable Overheads    $12
  • Fixed Overheads        $40

       Total                        $112


Electrical Division has capacity for 350,000 and has been selling 250,000 per year @ $136 each. The Assembly Division had been buying batteries from outside sources for $130 each.

If this is a one time offer should the electrical division accept the price of $104 per unit for the order of the 90,000 batteries?  (6 marks)

Both divisions have been mandated to negotiate a transfer price to have the electrical division supply the assembly division on a longer term basis. What would be the floor and ceiling price to commence this negotiation? (6 marks)

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