Ganus Products, Incorporated, 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: The Electronics Division is currently purchasing 4,550 of these relays per year from an overseas supplier at a cost of $22 per relay.Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $5 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?

A) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
B) The answer cannot be determined from the information that has been provided.
C) 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.
D) 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.

Question

Ganus Products, Incorporated, 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:

The Electronics Division is currently purchasing 4,550 of these relays per year from an overseas supplier at a cost of $22 per relay.Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $5 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?

A) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
B) The answer cannot be determined from the information that has been provided.
C) 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.
D) 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.

AMITY MBA-2 · Accepted Answer

Final Answer : C, Explanation :  The minimum transfer price that the Relay Division should be willing to accept is $17 ($22 outside supplier cost - $5 variable cost savings) per relay. If the Relay Division were to sell the relays to the Electronics Division at a transfer price between $17 and $22, both divisions would be financially better off than if the Electronics Division were to continue buying its relays from the outside supplier at a cost of $22. The Relay Division would receive a higher price per unit and would not be selling to outside customers at a loss. The Electronics Division would save money on the cost of each relay and would save $5 in variable expenses that would have been incurred if the relay had been purchased from the outside supplier. Therefore, there exists a transfer price that would benefit both divisions.

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