Question

Cor Products casa Valve Division that 31 Help Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows: Cheche 02-19 41 Capacity in units Selling price to outside customers on the intermediate market 230,eee Variable costs per unit $ 16 Fixed costs per unit (based on capacity) $ 10 $ 7 Print The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 20,000 valves per year from an overseas supplier at a cost of $15 per valve. 1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range. If any, for the transfer price between the two divisions? Transfer price 2. Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions? Transfer price < Prev 31 of 31 !!! Next

Answer 1

1. $10 < Transfer Price < $15 As the valve division has excess capacity, the transfer price in this case will be greater than equal to variable cost per unit and less than equal to purchase price per unit for pump division from outside market. 2. In this case, pump division would like to buy at a price which is less than equal to $15 per valve. But the valve division would like to sell at a price which is greater than equal to $16 per valve as it does not have any excess capacity. Thus, there would be no acceptable range or price between the two divisions.