Tommasino Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below: The Automotive Division is currently purchasing 9,000 of these motors per year from an overseas supplier at a cost of $72 per motor.
Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. Does there exist a transfer price that would make both the Motor and Automotive Division financially better off than if the Automotive Division were to continue buying its motors from the outside supplier?

Question

Tommasino Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below:  The Automotive Division is currently purchasing 9,000 of these motors per year from an overseas supplier at a cost of $72 per motor.
Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. Does there exist a transfer price that would make both the Motor and Automotive Division financially better off than if the Automotive Division were to continue buying its motors 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 > $22 per unit + ($0 ÷ 9,000 units) = $22 per unit + $0 per unit = $22 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 < $72 per unit Both divisions would be financially better off making the transfer at any transfer price between $22 per unit and $72 per unit.