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 is the range of prices that 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 range of transfer prices should be between the variable cost and the market price. In this case, Division B's variable cost is $25 per unit and the market price is $30 per unit. Therefore, the range of transfer prices should be between $25 and $30 per unit. The offer from Division A to purchase the units at $22 per unit is below the variable cost and would not be beneficial for the company as a whole. Therefore, the best choice is D, which includes the range of $25 to $30 per unit.

Heart Company Has Two Divisions