Answer :
a) Impact on profit increased by $154,000
b) Minimum transfer price = $7
c) Maximum transfer price from Bishop's perspective= $14
Explanation :
As per the data given in the question,
a) Effect on operating profit :
Purchase price from outside = $14 per unit
Variable cost of production internally = $7
Profit per unit = $7
Total number of units = 22,000
Total increment in operating profit is
= 22,000 units × $7
= $154,000
In this case the fixed cost is to ignored
b) Minimum transfer price :
Since, Polk has excess capacity so there will be no increment in fixed cost and Polk would recover its variable cost which is $7
Hence, Minimum transfer price = $7
c) Maximum transfer price from perspective of Bishop :
If price i.e internal is more than $14, there would be a loss For Bishop so it would be purchase from outside due to which the whole company will lose the incremental operating profit of $154,000
Hence, Maximum transfer price = $14
