Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below: The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve.
What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division?
A) $45 per unit
B) $28 per unit
C) $47 per unit
D) $17 per unit

Question

Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:  The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve.
What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division?
A) $45 per unit 
B) $28 per unit 
C) $47 per unit 
D) $17 per unit

Quizplus · Accepted Answer

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 < $47 per unit