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. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The maximum transfer price that the Thomas Division would be willing to pay would be

Question

Quizplus · Accepted Answer

The maximum transfer price that the Thomas Division would be willing to pay is £400. This is because the Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500. Therefore, the maximum transfer price that the Thomas Division would be willing to pay is £500 - £100 = £400.

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