Godina Products, Inc., has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below: The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver.
Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?

Question

Godina Products, Inc., has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below:  The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver.
Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows: 11eacbfc_c7cb_7c16_8ffe_e795f1acb3e5_TB7552_00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > $35 per unit + ($540,000 ÷ 10,000 units) = $35 per unit + $54 per unit = $89 per unit From the perspective of the purchasing division, the transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $81 per unit No transfer will be made between the two divisions because the minimum price that the selling division is willing to accept is greater than the maximum price that the buying division is willing to pay.