Question

Pips Products, Inc., has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below:

Capacity in units		10,000
Selling price to outside customers	$	89
Variable cost per unit	$	35
Fixed cost per unit (based on capacity)	$	42

The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver.

Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?

Group of answer choices

No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept

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

Yes, the minimum transfer price that the selling division should be willing to accept is less than the transfer price that the buying division should be willing to accept

The answer cannot be determined from the information that has been provided

Answer 1

As the Receiver Division does not have excess capacity, the minimum acceptable transfer price would be Selling price to outside customers.

Minimum transfer price that the selling division should be willing to accept = $89

Maximum price that the buying division should be willing to accept = $81

No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept

Option A is correct