PROBLEM 12-16. (Appendix) Transfer Pricing [LO A1] Montana Woolen Products has two divisions: a Fabric division that manufactures woolen fabrics and a Clothing division that manufactures woolen dresses, coats, shirts, and accessories. All fabric used by the Clothing division is supplied by the Fabric division, which also supplies fabric to outside companies.
A. Suggest a transfer price for the fabric assuming that the Fabric division is operating at only 60 percent of capacity due to a surge in popularity of “easy-care” fabrics made of polyester and rayon.
B. Suggest a transfer price for fabric assuming that the Fabric division is operating at capacity due to a revival of consumer interest in natural products and development of lightweight, wrinkle- resistant woolen fabrics.
C. Explain how your choices in parts a and b are related to the opportunity cost concept.