Question

Division X and Division Y are segments of the Goddard Company. Currently, Division X is selling 2,000 of its units to Division Y at a transfer price of $10. For the next time period, the managers of the 2 divisions have again agreed to transfer 2,000 units from X to Y, but at a transfer price of $8 rather than $10. If everything else remains the same as last period, what effect will this change have on the overall profits of the Goddard Company

Answer 1

Answer: The overall profits of the Goddard company will stay the same.

Explanation:

Division X has decided to lower it's transfer price to $8 meaning that it's profits will decrease.

Division Y is now buying at a lower cost but everything else remains the same which means that they are now making more profit.

This will mean that for the overall company, Division X will be making less profit than last time but Division Y will be making more profit. These will cancel themselves out and the company's profits will therefore remain unchanged.