Royal Products, Incorporated, 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 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector.Assume that the Connector Division is selling all of the connectors it can produce to outside customers. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division?
A) $56 per unit
B) $65 per unit
C) $69 per unit
D) $21 per unit

Question

Royal Products, Incorporated, 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 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector.Assume that the Connector Division is selling all of the connectors it can produce to outside customers. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division?
A) $56 per unit 
B) $65 per unit 
C) $69 per unit 
D) $21 per unit

Quizplus · Accepted Answer

The minimum acceptable transfer price for the connectors should be equal to the outside market price, which is the highest price that the Connector Division could receive for its product. Therefore, the minimum transfer price should be $69 per unit, which is the current market price for the product. Pricing the product below the market price could result in lost profit for the Connector Division. Therefore, choices A and D can be eliminated. Choice B would result in no profit for the Connector Division, which is not acceptable.

Royal Products, Incorporated, Has a Connector Division That Manufactures and Sells