Blitch Products, Incorporated, has a Screen Division that manufactures and sells a number of products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below: The Home Security Division is currently purchasing 2,000 of these screens per year from an overseas supplier at a cost of $50 per screen. Assume that the Screen Division has enough idle capacity to handle all of the Home Security Division's needs. Does there exist a transfer price that would make both the Screen and Home Security Division financially better off than if the Home Security Division were to continue buying its screens 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) The answer cannot be determined from the information that has been provided.
C) 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.
D) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.

Question

Blitch Products, Incorporated, has a Screen Division that manufactures and sells a number of products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below:  The Home Security Division is currently purchasing 2,000 of these screens per year from an overseas supplier at a cost of $50 per screen. Assume that the Screen Division has enough idle capacity to handle all of the Home Security Division's needs. Does there exist a transfer price that would make both the Screen and Home Security Division financially better off than if the Home Security Division were to continue buying its screens 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) The answer cannot be determined from the information that has been provided. 
C) 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. 
D) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.

Quizplus · Accepted Answer

Since the Screen Division has enough idle capacity to handle all of the Home Security Division's needs, it can offer a transfer price lower than what the Home Security Division is currently paying to the overseas supplier ($50 per screen). This transfer price should be higher than the incremental cost to the Screen Division, which includes direct materials, direct labor, and variable manufacturing overhead, to produce each screen. If the transfer price is set at this incremental cost, both divisions will be financially better off as the Home Security Division will save money and the Screen Division will generate additional profit. Therefore, there exists a transfer price that makes both divisions better off. 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, which is $50, the current market price.

Blitch Products, Incorporated, Has a Screen Division That Manufactures and Sells