**Exercise 15-34 (Algo) Evaluate Transfer Pricing System: Negotiated Rates (LO 15-2, 3)**Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product.The monthly income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 15,000 units.| | Manufacturing | Marketing ||---------------------|---------------|------------|| Revenues | $ 4,500 | $15,000 || Variable costs | 3,900 | 6,700 || Contribution margin | $ 600 | $ 8,300 || Fixed costs | 300 | 800 || Divisional profit | $ 300 | $ 7,500 |Assume there is no special order pending.**Required:**a. What transfer price would you recommend for Tops Corporation?b. Using your recommended transfer price, what will be the income of the two divisions, assuming monthly production and sales of 15,000 units?c. The manager of the Manufacturing Division complains about the transfer price, saying that division profits are unfairly low. The two division managers meet and negotiate a transfer price of $345. What will be the income of the two divisions assuming monthly production and sales of 15,000 units?

Working Notes: 1. Variable cost for Marketing = The Transfer price which is charged by the Manufacturing division Plus the Marketing division own variable cost = The Transfer price which is charged by the Manufacturing division = $3,900,000 = Marketing division own variable cost = $6,700,000 - $4,500,000 = $2,200,000 = Variable cost for Marketing = $3,900,000+ $2,200,000 = $6,100,000 2. Variable cost for Marketing = The Transfer price which is charged by the Manufacturing division Plus the Marketing division own variable cost = The Transfer price which is charged by the Manufacturing division = $5,175,000 = The Marketing division own variable cost = $6,700,000 - $4,500,000 = $2,200,000 = Variable cost for Marketing = $5,175,000+ $2,200,000 = $7,375,000 (a) Transfer Price = Variable cost for manufacturing division = $3,900,000 or $260 per unit ($3,900,000 /15,000 units) (b) Manufacturing Marketing Working Note Revenue $3,900,000 $15,000,000 Variable costs $3,900,000 $6,100,000 1 Contribution margin $0 $8,900,000 Fixed costs $300,000 $800,000 Divisional Profit ($300,000) $8,100,000 (c) Manufacturing Marketing Working Note Revenue ($345 * 15,000 units) =$5,175,000 $15,000,000 Variable costs $3,900,000 $7,375,000 2 Contribution margin $1,275,000 $7,625,000 Fixed costs $300,000 $800,000 Divisional Profit $975,000 $6,825,000