Heart 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 $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, what range of prices should be used during negotiations between the two divisions?
A) $22 to $30
B) $22 to $25
C) over $30
D) $25 to $30

Question

Quizplus · Accepted Answer

The transfer price should ideally reflect the market price, which in this case is $30. However, Division B has a variable cost of $25, so selling at anything below that would result in a loss for the company. Therefore, the range of negotiation should be between the variable cost and market price, which is $25 to $30. Choice A and C are outside this range, and Choice B is too low to cover Division B's variable cost.

Heart Company Has Two Divisions