Leneau Products, Incorporated, 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: The Transmission Division is currently purchasing 12,000 of these connectors per year from an overseas supplier at a cost of $52 per connector. Assume that the Valve Division is selling all of the valves 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 Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?

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

Question

Leneau Products, Incorporated, 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:

The Transmission Division is currently purchasing 12,000 of these connectors per year from an overseas supplier at a cost of $52 per connector. Assume that the Valve Division is selling all of the valves 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 Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?

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

Krishna Jayaswal · Accepted Answer

Final Answer : A, Explanation :  A transfer price lower than the external supplier price of $52 would benefit both the Valve and Pump Divisions. With a transfer price in place, the Valve Division would sell the valves to the Pump Division, reducing external shipping and selling costs by $5 per valve. Therefore, the amount of transfer price should be between $47 and $52 ($52 external supplier price – $5 internal cost savings = $47 transfer price). Since both divisions would benefit financially, the Valve Division should be willing to accept a transfer price less than $52 and the Pump Division should be willing to pay a transfer price higher than $47. Thus, 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.

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