Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, the range of prices that should be used during negotiations between the two divisions is
A)$22 to $30
B)$22 to $25
C)over $30
D)$25 to $30

Question

Quizplus · Accepted Answer

The correct range for the transfer price is $25 to $30. This range is beneficial for the company as a whole because it covers Division B's variable cost of $25 (ensuring they don't sell at a loss) and goes up to the market price of $30 (ensuring Division A doesn't pay more than it would externally).

Heart Company Has Two Divisions