Germano Products, Incorporated, 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: The Pool Products Division is currently purchasing 10,000 of these pumps per year from an overseas supplier at a cost of $94 per pump.Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. 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?

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

Question

Germano Products, Incorporated, 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:

The Pool Products Division is currently purchasing 10,000 of these pumps per year from an overseas supplier at a cost of $94 per pump.Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. 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?

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

Zybrea Knight · Accepted Answer

Final Answer : B, Explanation :  Since the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs, there exists a transfer price that would make both divisions financially better off. The minimum transfer price that the Pump Division should be willing to accept is the variable cost of producing the pumps, which would be less than the $94 per pump that the Pool Products Division is currently paying to the overseas supplier. The maximum transfer price that the Pool Products Division would be willing to pay is the current market price of $94 per pump. Therefore, there exists a range of transfer prices between the variable cost and the market price that would make both divisions financially better off.

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