Exam 22: Transfer Pricing

Trendell Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The company has a Automotive Division that could use this motor in one of its products. The Automotive Division is currently purchasing 8,000 of these motors per year from an overseas supplier at a cost of $66 per motor. Required: Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?

Oberley Products, Inc., has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below: The Industrial Products Division is currently purchasing 5,000 of these receivers per year from an overseas supplier at a cost of $58 per receiver. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $6 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?