Godina Products, Incorporated, has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below: The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver. Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?
A) 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.
B) 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 should be willing to accept.
C) The answer cannot be determined from the information that has been provided.
D) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

Question

Godina Products, Incorporated, has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below:  The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver. Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?
A) 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. 
B) 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 should be willing to accept. 
C) The answer cannot be determined from the information that has been provided. 
D) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

Quizplus · Accepted Answer

The Receiver Division is selling all of the receivers it can produce to outside customers, which indicates that it does not have idle capacity to supply to the Industrial Products Division. Therefore, the minimum transfer price that the selling division should be willing to accept will exceed the maximum transfer price that the buying division should be willing to accept because the Receiver Division incurs opportunity costs by selling to the Industrial Products Division instead of selling to outside customers. As a result, there does not exist a transfer price that would make both divisions financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier.

Godina Products, Incorporated, Has a Receiver Division That Manufactures and Sells