Yearout Products, Incorporated, has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below: The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $53 per valve.Assume that the Valve Division is selling all of the valves it can produce to outside customers. 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 should be willing to accept.
B) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.
C) The answer cannot be determined from the information that has been provided.
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

Yearout Products, Incorporated, has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $53 per valve.Assume that the Valve Division is selling all of the valves it can produce to outside customers. 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 should be willing to accept.
B) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.
C) The answer cannot be determined from the information that has been provided.
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.

Devon Marrero · Accepted Answer

Final Answer : B, Explanation :  For both divisions to be financially better off, the transfer price should fall between the seller's incremental cost and the buyer's maximum price. The incremental cost of the Valve Division is not provided in the question, so we cannot determine the minimum transfer price. However, we do know that the overseas supplier's price is $53 per valve, which is the maximum price the Pump Division is willing to pay. Therefore, if the Valve Division's incremental cost plus any markup is higher than $53, then a transfer price that benefits both divisions does not exist. Hence, option B is correct.

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