Question

Wetherald Products, Incorporated, has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below: Capacity in units 56,000 Selling price to outside customers $ 86 Variable cost per unit $ 55 Fixed cost per unit (based on capacity) $ 13 The Pool Products Division is currently purchasing 4,200 of these pumps per year from an overseas supplier at a cost of $76 per pump. Assume that the Pump Division is selling all of the pumps it can produce to outside customers. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division

Answer 1

Answer:

Minimum transfer price = $86

Explanation:

Pump Division  is operating at full capacity, hence it has no excess capacity

This implies that it can not produce enough to meet both the internal demand (from the Pool Division ) and external buyers.

Hence, it implies that Pump Division cannot accommodate the demands of the Pump Division  at a price lower than the  external price of $86. Any price lower than $86  would result into a loss in contribution.

To maximize and optimize the group profit, the minimum transfer price should be set as follows:

Minimum transfer price = External selling price at which Pump Division sells to outside customers

Minimum transfer price = $86