a.From the perspective of Division Y, profits would increase as a result of the transfer if and only if:Transfer price > Variable cost + Opportunity costThe opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred:Opportunity cost = [($34.00 − $25.00 − $2.00) × 3,000*] / 5,000 = $4.20
Therefore, Transfer price > $25.00 + $4.20 = $29.20.From the viewpoint of Division X, the transfer price must be less than the cost of buying the units from the outside supplier. Therefore,Transfer price < $33.00.Combining the two requirements, we get the following range of transfer prices:$29.20 < Transfer price < $33.00.b.Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $29.20, but the cost of purchasing them from the outside supplier is $33.00. Therefore, the company's profits increase on average by $3.80 for each of the special parts that is transferred within the company.