Ganus Products, Incorporated, Has a Relay Division That Manufactures and Sells

question 216

Multiple Choice

Ganus Products, Incorporated, 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 4,550 of these relays per year from an overseas supplier at a cost of $22 per relay.Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $5 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?

• A) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.
• B) The answer cannot be determined from the information that has been provided.
• C) 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.
• D) 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.

Understand the fundamental concepts of accrual accounting, including the difference between accrual and cash basis accounting.

Grasp the purpose and necessity of adjusting entries in the accounting cycle.

Comprehend the principles of revenue and expense recognition and their impact on financial statements.

Recognize the significance of the time period assumption in accounting and its implications for financial reporting.

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Definitions:

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Security Market Line

A line that represents the relationship between the risk of an investment and its expected return, used in the Capital Asset Pricing Model.

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A term used to denote that an asset's market price is considered reasonable based on its earnings and growth prospects.