Tommasino Products, Incorporated, 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?
A) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
B) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
C) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept.
D) The answer cannot be determined from the information that has been provided.

Question

Tommasino Products, Incorporated, 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?
A) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs. 
B) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier. 
C) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept. 
D) The answer cannot be determined from the information that has been provided.

Quizplus · Accepted Answer

Since the Motor Division has enough idle capacity to handle all of the Automotive Division's needs, a transfer price can be established which would make both divisions financially better off than if the Automotive Division were to continue buying its motors from the outside supplier. The minimum transfer price for the Motor Division should be lower than what the Automotive Division is currently paying its outside supplier, which is $72 per motor. On the other hand, the maximum transfer price that the Automotive Division would be willing to pay should be less than what it is currently paying its outside supplier plus any additional costs associated with buying from the Motor Division (e.g., shipping costs, possible delays in delivery). Hence, choice C is correct.

Tommasino Products, Incorporated, Has a Motor Division That Manufactures and Sells