Question

Germano Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity) 87,500 $ 91 $ 32 $ 38 The Pool Products Division is currently purchasing 23,000 of these pumps per year from an overseas supplier at a cost of $86 per pump. Assume that the Pump Division is selling all of the pumps it can produce to outside customers. Does there exist a transfer price that would make both the Pump and Pool Products Division financially better off than if the Pool Products Division were to continue buying its pumps from the outside supplier? Multiple Choice Yes, both divisions are always better off regardless of whether the selling division has enough Idle capacity to handle all of the buying division's needs. Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division should be willing to accept o ooo O The answer cannot be determined from the Information that has been provided. No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

Answer 1

Multiple Choice

1, Option 3 - The answer cannot be determined with the information provided.

Explanation: It has been mentioned that the Pumps division is selling all the pumps it can produce to outside customers, Nothing is mentioned about the idle capacity to handle the Pools division needs. Therefore, no enough information to ascertain the answer.

2, Option 3 - Worse off of $43200

Explanation: The company has ample capacity to handle all of Division B needs without increase in fixed cost and without cutting into sales to outside customers. The variable cost incurred for each unit is $17 (fixed cost is not taken into account, as it will be incurred regardless the internal sale) . There will be a gain of $3 per unit ($20-$17) totaling to a income of $43200 ( 14400*$3). By not accepting the offer, the company will be losing out on $43200.