Mandolin Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per unit market price is $30 per unit, with a variable cost of $17. The manager of Division A has offered to purchase the units at $15 per unit. In an effort to make this transfer price beneficial for the company as a whole, what is the range of prices that should be used during negotiations between the two divisions?
A) $15 to $30
B) $15 to $17
C) over $30
D) $17 to $30

Question

Quizplus · Accepted Answer

The range of prices that should be used during negotiations should be between the variable cost per unit ($17) and the market price per unit ($30). This ensures that both divisions benefit from the transaction. Therefore, the best choice is D, which is $17 to $30. Choosing option A ($15 to $30) would mean that Division B would suffer losses on each unit sold, while choosing option B ($15 to $17) would mean that Division A would be getting the units at a price lower than the variable cost, which is not beneficial for the company as a whole. Option C (over $30) would lead to Division A paying more than the market price, which is not necessary.

Mandolin Company Has Two Divisions