Question

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:

Capacity in units		42,500
Selling price to outside customers	$	33
Variable cost per unit	$	10
Fixed cost per unit (based on capacity)	$	20

The Electronics Division is currently purchasing 5,950 of these relays per year from an overseas supplier at a cost of $30 per relay.

Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $9 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 Relay and Electronics Division financially better off than if the Electronics Division were to continue buying its relays from the outside supplier?

Multiple Choice

No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.

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

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.

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.

Answer 1

Solution:

Relay division (Selling Division) is selling all of the relays it can produce to outside customers for $33.

If transfer is made to Electronic division (Buying division), Avoidable variable Expense = $9 per unit.

Therefore minimum transfer price that the buying Division would accept = $33- $9 = $24

Maximum transfer price that the buying division would accept = $30

Hence 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..

Hence Correct anwer is "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."