(Appendix 11A) Yearout Products, Inc

question 93

Multiple Choice

(Appendix 11A) Yearout Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:
The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $53 per valve.
-Assume that the Valve Division is selling all of the valves it can produce to outside customers.Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?

• A) 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.
• B) 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.
• C) The answer cannot be determined from the information that has been provided.
• 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.

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Definitions:

Base Period

A specific time period against which economic indicators or financial indexes are measured to assess changes over time.

Index of Prices

A statistical measure that shows changes in the price level of a selected basket of goods and services over time.

Farm Product

Products that are derived from agriculture, including both crops and livestock.