Question

Quiz -CH 11 Saved Help Save & Exit Check my 5 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) 90.00e $ 93 $ 33 $ 39 The Pool Products Division is currently purchasing 24,000 of these pumps per year from an overseas supplier at a cost of $88 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 The onswer connot be determined from the informotion thet has been provided. 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. No, the minimum transfer price that the selling division should be willing to accept exceeds the maxlmum transfer price that the buying divislon should be willing to accept. 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.

Answer 1

The answer is the 3rd options: 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.

Pump division can sell all its production at a price of $93/unit. That means the transfer price should be minimum of $93/unit. However, the pool products division is currently purchasing it from outside at $88/unit, therefore it would rather buy from outside at $88/unit than pay a minimum of $93/unit.