The Assembly Division of Ikon Aircraft Corporation purchases hydraulic valves from the company's Machining Division. Assembly is free to purchase one particular valve from vendors outside the company and can do so at a market price of $800 per unit. The Machining Division currently has adequate capacity to supply all of the Assembly Division's needs for the valve, and can produce the valve at a unit variable cost of $500 and unit fixed costs of $200. The Machining Division also incurs variable selling costs of $40 on each unit sold outside the company. Under these circumstances, the maximum transfer price for the valve is:
A) $500.
B) $800.
C) $700.
D) $740.

Question

Quizplus · Accepted Answer

The maximum transfer price is the market price of $800 per unit, as the Assembly Division would not pay more than the market price to purchase the valves internally when it has the option to buy them externally at this price.

The Assembly Division of Ikon Aircraft Corporation Purchases Hydraulic Valves