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 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $4 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 Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves 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 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $4 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 Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves 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.

Hannan Farooq · Accepted Answer

Final Answer : C, Explanation :  The transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier is between $55 and $59 (cost of outside supplier plus variable expenses saved). Since the Valve Division is selling all of the valves it can produce to outside customers, it has idle capacity that it could use to produce valves for the Pump Division. Therefore, the Valve Division should be willing to accept a transfer price that is less than the selling price to outside customers, but more than the variable cost of producing the valve ($55-$58). On the other hand, the Pump Division should be willing to pay a transfer price that is less than the cost of buying from the outside supplier ($59), but more than the variable cost of producing the valve ($55-$58). Thus, there exists a range of transfer prices within which both divisions would be financially better off if the transfers were to take place.

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