Question

Stable Company manufactures power tools. The Electric Drill Division (an investment center) can purchase the motors for the drills from the Motor Division (another investment center) or from an outside vendor. The cost to purchase from the outside vendor is $26. The Motor Division also sells to outside customers. The motor needed by the Electric Drill Division sells for $32 to outside customers and has a variable cost of $23. The Motor Division has excess capacity. 21. 22. If Stable Company allows division managers to negotiate transfer prices, what is the minimum amount the manager of the Motor Division should consider? What is the maximum transfer price the manager of the Electric Drill Division should consider? 21. If Stable Company allows division managers to negotiate transfer prices, what is the minimum amount the manager of the Motor Division should consider? The Motor Division has excess capacity, so the manager should consider a minimum transfer price of 22. What is the maximum transfer price the manager of the Electric Drill Division should consider? $23, its variable cost per unit. The maximum transfer price the manager of the Electric Drill Division should consider is $26, the price the Electric Drill Division can purchase the motor for from an outside vendor. $32, the price that it can sell the motor to outside customers.

Answer 1

21.Since there is excess capacity, no additional fixed costs will be incurred on the transferred units

Hence, minimum acceptable transfer price is $23, its variable cost per unit

22.The maximum price is $26, the price it can purchase the motor from an outside vendor