Figure 3
The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows:
a Based on a practical volume of 250,000 components
Other costs incurred by the Adam Division are as follows:
The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each.
-Refer to Figure 3 above. The maximum transfer price that the West Division would be willing to pay is

Question

Figure 3
The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows:
 a Based on a practical volume of 250,000 components
Other costs incurred by the Adam Division are as follows:
  The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each.
-Refer to Figure 3 above. The maximum transfer price that the West Division would be willing to pay is

Quizplus · Accepted Answer

The maximum transfer price that the West Division would be willing to pay is the market price or the external purchase price of the product, assuming no additional costs for purchasing externally. If the market price is £90, then that is the maximum they would be willing to pay rather than sourcing the product externally for a higher price.

Figure 3 the Adam Division Produces a Component That Is Used by Used