Zumsteg Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump. Data concerning that pump appear below:?Capacity in units71,000?Selling price to outside customers$88?Variable cost per unit$61?Fixed cost per unit (based on capacity)$19The company has a Pool Products Division that could use this pump in one of its products. The Pool Products Division is currently purchasing 7,000 of these pumps per year from an overseas supplier at a cost of $81 per pump.Required:Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?
What will be an ideal response?
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $61 per unit + ($0 ÷ 7,000 units) = $61 per unit + $0 per unit = $61 per unit
From the perspective of the purchasing division, the transfer is financially attractive if and only if:
Transfer price < Cost of buying from outside supplier
Transfer price < $81 per unit
Combining the two requirements, the range of acceptable transfer prices is:
$61 per unit < Transfer price < $81 per unit
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