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 is selling all of the motors it can produce to outside customers. 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 is selling all of the motors it can produce to outside customers. 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

The total contribution margin on lost sales is computed as follows: 11eacbfc_c7d9_5f13_8ffe_f3b73ca1864e_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 > $22 per unit + ($468,000 ÷ 9,000 units) = $22 per unit + $52 per unit = $74 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 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.