An appropriate transfer price between two divisions of The Fathom Company can be determined from the following data: (CIA adapted)
$\begin{array}{llr}
\text { Fabricating Division } &\
\text {Market price of subassembly } &\$50\
\text { Variable cost of subassembly } &\$20\
\text { Excess capacity (in units)} &1,000\
\text { Assembling Division} &\
\text { Number of units needed } &900\
\end{array}$

What is the natural bargaining range for the two divisions?
A) Between $20 and $50.
B) Between $50 and $70.
C) Any amount less than $50.
D) $50 is the only acceptable transfer price.

Question

An appropriate transfer price between two divisions of The Fathom Company can be determined from the following data: (CIA adapted)
$\begin{array}{llr}
  \text {  Fabricating Division } &\
 \text {Market price of subassembly  } &\$50\
 \text { Variable cost of subassembly } &\$20\
 \text {  Excess capacity (in units)} &1,000\
 \text {  Assembling Division} &\
 \text { Number of units needed } &900\
\end{array}$

What is the natural bargaining range for the two divisions?
A) Between $20 and $50.
B) Between $50 and $70.
C) Any amount less than $50.
D) $50 is the only acceptable transfer price.

Quizplus · Accepted Answer

The natural bargaining range is between the variable cost of the subassembly ($20) and the market price of the subassembly ($50).

An Appropriate Transfer Price Between Two Divisions of the Fathom