Yearout Products, Incorporated, 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 9,000 of these valves per year from an overseas supplier at a cost of $53 per valve.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $1 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?
A) 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.
B) The answer cannot be determined from the information that has been provided.
C) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division would accept.
D) 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.

Question

Yearout Products, Incorporated, 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 9,000 of these valves per year from an overseas supplier at a cost of $53 per valve.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $1 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?
A) 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. 
B) The answer cannot be determined from the information that has been provided. 
C) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division would accept. 
D) 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.

Quizplus · Accepted Answer

The minimum transfer price that the Valve Division should be willing to accept for the valve is the variable cost per unit, which is $40 ($53 - $13 saved in variable expenses). However, the Pump Division will not pay more than the current cost of $53 per valve since they could continue purchasing from the overseas supplier. Therefore, the minimum transfer price that the Valve Division should be willing to accept exceeds the maximum transfer price that the Pump Division would accept, and thus, a transfer price that would make both divisions financially better off does not exist.

Yearout Products, Incorporated, Has a Valve Division That Manufactures and Sells