Blitch Products, Inc., has a Screen Division that manufactures and sells a number of products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below: The Home Security Division is currently purchasing 2,000 of these screens per year from an overseas supplier at a cost of $50 per screen.
Assume that the Screen Division has enough idle capacity to handle all of the Home Security Division's needs. Does there exist a transfer price that would make both the Screen and Home Security Division financially better off than if the Home Security Division were to continue buying its screens from the outside supplier?

Question

Blitch Products, Inc., has a Screen Division that manufactures and sells a number of products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below:  The Home Security Division is currently purchasing 2,000 of these screens per year from an overseas supplier at a cost of $50 per screen.
Assume that the Screen Division has enough idle capacity to handle all of the Home Security Division's needs. Does there exist a transfer price that would make both the Screen and Home Security Division financially better off than if the Home Security Division were to continue buying its screens from the outside supplier?

Quizplus · Accepted Answer

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 > $26 per unit + ($0 ÷ 2,000 units) = $26 per unit + $0 per unit = $26 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 < $50 per unit Both divisions would be financially better off making the transfer at any transfer price between $26 per unit and $50 per unit.