Germano Products, Inc., has a Pump Division that manufactures and sells a number
ID: 2532853 • Letter: G
Question
Germano Products, Inc., 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:
The Pool Products Division is currently purchasing 24,000 of these pumps per year from an overseas supplier at a cost of $88 per pump.
Assume that the Pump Division is selling all of the pumps it can produce to outside customers. Does there exist a transfer price that would make both the Pump and Pool Products Division financially better off than if the Pool Products Division were to continue buying its pumps from the outside supplier?
Multiple Choice:
1, Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
2, Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division should be willing to accept.
3, The answer cannot be determined from the information that has been provided.
4, No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.
However, Ganus Products, Inc., has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:
The Electronics Division is currently purchasing 6,650 of these relays per year from an overseas supplier at a cost of $34 per relay.Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $11 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Relay and Electronics Division financially better off than if the Electronics Division were to continue buying its relays from the outside supplier?
Multiple Choice:
1, No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
2, The answer cannot be determined from the information that has been provided.
3, Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept. Both divisions would be financially better off if the transfers were to take place.
4, Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
Related Question:
Division A makes a part with the following characteristics:
Division B, another division of the same company, would like to purchase 15,200 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $20 each. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the $20 price internally and Division B continues to buy from the outside supplier, the company as a whole will be:
Multiple Choice
1, worse off by $48,000 each period.
2, worse off by $50,000 each period.
3, worse off by $30,400 each period.
4, worse off by $60,800 each period.
Capacity in units 90,000 Selling price to outside customers $ 93 Variable cost per unit $ 33 Fixed cost per unit (based on capacity) $ 39Explanation / Answer
Question - 1 ................... Option - 4
4, No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.
Explanation:
Pump Division is working at full capacity. In the absence of any spare capacity ........ $ 93 will be the minimum acceptable price for internal transfere for pump division. But Pool division is already buying such pump at a price of $88 which shall be the maximum acceptable price it can pay for. Hence it is not possible to make a transfer price acceptable to both divisions.
Question - 2 ................Option - 3
3, Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept. Both divisions would be financially better off if the transfers were to take place.
Explanation : Minimum acceptable selling price = 37 - 11 ( saving in variable cost) = 26. This is less than Maximum acceptable price of buying division 34.
Question - 3 ...........Option - 4
4, worse off by $60,800 each period.
Explanation
15200 Units * ( 22 - 18) = 60800.
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