Question

Henderson Company manufactures electronics. The Calculator Division (an investment center) manufactures handheld calculators. The division can purchase the batteries used in the calculators from the Battery Division (another investment center) or from an outside vendor. The cost to purchase batteries from the outside vendor is $5. The transfer price to purchase from the Battery Division is $6. The Battery Division also sells to outside customers. The sales price is $6, and the variable cost is $3. The Battery Division has excess capacity Read the requirements Requirement 1. Should the Calculator Division purchase from the Battery Division or the outside vendor? O A. The Calculator Division should purchase from the outside vendor as long as the transfer price is $5.00 or less because the Battery Division has excess capacity OB. The Calculator Division should purchase from the outside vendor as long as the transfer price is $3.00 or more because the Battery Division is operating at capacity O C. The Calculator Division should purchase from the Battery Division as long as the transfer price is $5.00 or loss because the Battery Division has excess capacity O D. The Calculator Division should purchase from the Battery Division as long as the transfer price is $6.00 or less because the Battery Division has excess capacity Requirement 2. If Henderson Company allows division managers to negotiate transfer prices, what is the maximum transfer price the manager of the Calculator Division should consider? The maximum transfer price the Calculator Division should consider is Requirement 3. What is the minimum transfer price the manager of the Battery Division should consider? The ministrator the en t i re Click to select your answer.

Answer 1

1. Answer: Option C. The Calculator Division should purchase from the Battery Division as long as the transfer price is $5.00 or less because the Battery Division has excess capacity.

Since the cost of purchasing from the outside vendor is $5, the Calculator Division should purchase from the Battery Division only if it is offered a price of $5 or less. In such case, preference should be given to buying from the Battery Division because it also has excess capacity which may be used for supplying to the Calculator Division.

2. The maximum transfer price the Calculator Division should consider is $5.

Since any transfer price beyond $5 would result in the outside supplier’s price being more attractive.

3. The minimum transfer price the Battery Division should consider is $3.

The variable cost for the Battery Division is $3 and it has excess capacity. Hence, any transfer price which covers its variable cost will result in a contribution and hence should be considered.