Leneau Products, Inc., has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below: The Transmission Division is currently purchasing 12,000 of these connectors per year from an overseas supplier at a cost of $52 per connector.
Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?
A) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept. Both divisions would be financially better off if the transfers were to take place.
B) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
C) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
D) The answer cannot be determined from the information that has been provided.

Question

Leneau Products, Inc., has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:  The Transmission Division is currently purchasing 12,000 of these connectors per year from an overseas supplier at a cost of $52 per connector.
Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?
A) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept. Both divisions would be financially better off if the transfers were to take place. 
B) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs. 
C) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier. 
D) The answer cannot be determined from the information that has been provided.

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows: 11eacbfc_c7d0_5e30_8ffe_4df75d4256c5_TB7552_00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > ($25 per unit − $5 per unit) + ($372,000 ÷ 12,000 units) = $20 per unit + $31 per unit = $51 per unit From the perspective of the purchasing division, the transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $52 per unit Combining the two requirements, the range of acceptable transfer prices is: $51 per unit < Transfer price < $52 per unit