Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools.Hurley Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost. Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand tools.An outside supplier,R & M Steel,has offered to supply 20,000 units of the handle to Ironwood Division for $1.25 per unit.Hurley currently has idle capacity that cannot be used.If Cohasset would like to develop a range of transfer prices,what would be the maximum transfer price that Ironwood would be willing to pay?
A)$1.00.
B)$1.10.
C)$1.25.
D)$1.30.

Question

Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools.Hurley Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.  Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand tools.An outside supplier,R & M Steel,has offered to supply 20,000 units of the handle to Ironwood Division for $1.25 per unit.Hurley currently has idle capacity that cannot be used.If Cohasset would like to develop a range of transfer prices,what would be the maximum transfer price that Ironwood would be willing to pay?
A)$1.00. 
B)$1.10. 
C)$1.25. 
D)$1.30.

Quizplus · Accepted Answer

The maximum transfer price that Ironwood would be willing to pay for the handles is the price offered by the outside supplier, which is $1.25 per unit. Ironwood would not pay more than this price if they can get the same product from an external supplier at a lower cost. Therefore, the correct answer is (C) $1.25.

Cohasset Company Currently Manufactures All Component Parts Used in the Manufacture