Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters, and that processed and sold1,400,000 liters last year at a price of $4 per liter. The purpose of theacquisition was to furnish oil for the Cooking Division. The CookingDivision needs 800,000 liters of oil per year. It has been purchasing oil from supplies at the market price. Production costs at capacity of the olive oil company, now a division, are as follows: Direct materials per liter$ 1.00Direct processing labor$ 0.50Variable processing overhead$ 0.24Fixed processing overhead$ 0.40Total$ 2.14Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the live Oil Division argues that $4, the market price, is appropriate.

Themanager of the Cooking Division argues that the cost of $2.14 should beused, or perhaps a lower price, since fixed overhead cost should berecomputed with the larger volume. Any output of the Olive Oil Division notsold to the Cooking Division can be sold to outsiders for $4 per liter.Required:aCompute the operating income for the Olive Oil Division using atransfer price of $4.bCompute the operating income for the Olive Oil Division using atransfer price of $2.14.cWhat transfer price(s) do you recommend? Compute the operatingincome for the Olive Oil Division using your recommendation.