Question

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

Capacity in units		50,000
Selling price to outside customers	$	63
Variable cost per unit	$	22
Fixed cost per unit (based on capacity)	$	24

The Pool Products Division is currently purchasing 9,000 of these pumps per year from an overseas supplier at a cost of $58 per pump.

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

Multiple Choice

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 maximum transfer price that the buying division should be willing to accept.

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

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.

Answer 1

Solution:

Since Pump Division (selling division) is selling all of the pumps it can produce to outside customers, therefore Minimum trasfer price that the selling division should be willing to accept = Selling price to outside customers = $63

Maximum transfer price that the buying division should be willing to accept = existing purchase price = $58

Therefore, 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.

Hence correct answer is "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."