Figure 6
Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit.
The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500.
-Refer to Figure 6 above. The Jones Division can sell all that it produces for £360 each. The Jones Division needs 200 units. What is the correct transfer price?

Question

Quizplus · Accepted Answer

The correct transfer price is £360, which is the price at which the Jones Division can sell the component externally. Since the division is evaluated based on ROI and can sell all it produces at this price, it would not make sense to transfer the component internally for less than £360.

Figure 6 Callahan Industries Is a Decentralized Company That Evaluates Its Divisions