Altoona Corporation has two divisions, Hinges and Doors, which are both organize

Question

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers; the Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $30, $21 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $45.

The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (15,000 hinges) at a cost of $40. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first. What is the maximum transfer price from the Hinge Division to the Door Division?

$30. $21. $40. $45.

Explanation / Answer

Maximum price Door Division would like to pay for 15,000 hinges is the price on which they received an offer from outside vendor i.e $40 per hinges.

As we know from the fact, Hinge Division is operating significantly below capacity, so they can produce extra 15,000 Hinges without loosing any profit from the current production.

Calculation of proft on if they transfer on $40:
Transfer price $40
Less: Variable cost $21
Profit $19

So, the maximum transfer price from the Hinge Division to the Door Division is $40.

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