Fingado Products, Incorporated, has a Detector Division that manufactures and sells a number of products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear below: The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 per detector.Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What should be the minimum acceptable transfer price for the detectors from the standpoint of the Detector Division?
A) $32 per unit
B) $98 per unit
C) $91 per unit
D) $83 per unit

Question

Fingado Products, Incorporated, has a Detector Division that manufactures and sells a number of products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear below:  The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 per detector.Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What should be the minimum acceptable transfer price for the detectors from the standpoint of the Detector Division?
A) $32 per unit 
B) $98 per unit 
C) $91 per unit 
D) $83 per unit

Quizplus · Accepted Answer

The minimum transfer price for the detectors should be equal to or greater than the cost the Commercial Security Division pays to the overseas supplier, which is $91 per detector. However, the Detector Division should also consider its opportunity cost of selling the detectors to outside customers. Since it is currently selling all of its detectors to outside customers, the transfer price should be at least high enough to cover the opportunity cost.

We do not have any information about the cost to produce the detector, so we cannot use that as a basis for setting the transfer price. Therefore, the best option is to set the transfer price at the market price of the detector, which is the price that the outside customers are paying. The minimum acceptable transfer price should be at least $91 per detector. However, since the outside customers are willing to pay more than $91 per detector, the transfer price could be set higher. Option B of $98 per unit is the closest option to the market price and would be the best choice.

Fingado Products, Incorporated, Has a Detector Division That Manufactures and Sells