Garland Industries Is a Decentralized Company That Evaluates Its Divisions

Garland Industries is a decentralized company that evaluates its divisions based on ROI. The Shelly Division has the capacity to make 4,000 units of a component. The Shelly Division's variable costs are £160 per unit.
The Blake Division can use the Shelly component in the manufacturing of one of its own products. The Blake Division would incur £170 of variable costs to convert the component into its own product, which sells for £600.
Required:
The following requirements are independent of each other:
a.
Assume the Shelly Division can sell all of the components that it produces for £400 each. The Blake Division needs 200 units. What is the correct transfer price?
b.
Assume the Shelly Division can sell 3,500 units at £440. Any excess capacity will be unused unless the units are purchased by the Blake Division, which could use up to 200 units.
Determine the minimum transfer price that the Shelly Division would be willing to accept.
Determine the maximum transfer price that the Blake Division would be willing to pay.

Correct Answer:

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