Cichy Products, Inc., 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 5,000 of these valves per year from an overseas supplier at a cost of $85 per valve.
What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division?

Question

Cichy Products, Inc., 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 5,000 of these valves per year from an overseas supplier at a cost of $85 per valve.
What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division?

Quizplus · Accepted Answer

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 < $85 per unit