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) 47,500 $ 61 $ 21 23 The Pool Products Division is currently purchasing 8,000 of these pumps per year from an overseas supplier at a cost of $56 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?

Answer 1

OPTION 4: 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.

EXPLANATION:

the minimum transfer price that the selling division should be willing to accept is $61 because it is selling all the pumps it can produce to outside customers. The maximum transfer price that the buying division should be willing to accept is $56 because it can procure pumps at that price from outside supplier.