Question

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

Capacity in units		57,000
Selling price to outside customers	$	67
Variable cost per unit	$	22
Fixed cost per unit (based on capacity)	$	29

The Transmission Division is currently purchasing 11,000 of these connectors per year from an overseas supplier at a cost of $58 per connector.

What is the maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division?

Answer 1

• The Transmission is already purchasing 11000 units at the cost of $ 58 from outside.
• It will be beneficial for transmission division if it get a transfer price from Connecter Division less than $ 58.

This is because it is already paying $ 58 to outside supplier.

Any transfer price above the $ 58 per unit would be disadvantageous for the Transmission Division.

• Hence, the maximum price that the transmission division should be willing to pay for connecter transferred from connecter division = $ 58 per connecter. [Total $ 638,000 = 11000 x $58]