(Appendix 11A) Ganus Products, Inc., has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:
The Electronics Division is currently purchasing 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay.
-Assume that the Valve Division is selling all of the valves it can produce to outside customers.Also assume that $4 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs.Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?
A) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
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. Both divisions would be financially better off if the transfers were to take place.
D) 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.

Question

(Appendix 11A) Ganus Products, Inc., has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:
  The Electronics Division is currently purchasing 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay.
-Assume that the Valve Division is selling all of the valves it can produce to outside customers.Also assume that $4 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs.Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?
A) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier. 
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. Both divisions would be financially better off if the transfers were to take place. 
D) 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.

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows: 11ea7761_169d_e11b_81a5_dd2039b15ea0_TB2580_00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > ($20 per unit − $4 per unit) + ($294,000 ÷ 7,000 units) = $16 per unit + $42 per unit = $58 per unit From the perspective of the purchasing division, the transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $59 per unit Combining the two requirements, the range of acceptable transfer prices is: $58 per unit < Transfer price < $59 per unit