(TCO 8) The San Jose Manufacturing Company has two divisions in Kansas—the Holto
ID: 2469450 • Letter: #
Question
(TCO 8) The San Jose Manufacturing Company has two divisions in Kansas—the Holton Division and the Derby Division. Currently, Derby buys a part (10,000 units) from Holton for $16 per unit. Holton has purchased new equipment and wants to increase the price to Derby to $18 per unit. The controller of Derby claims that she cannot afford to go that high, because it will decrease the division’s profit to near zero. Derby can buy the part from an outside supplier for $16 per unit. The incremental costs per unit that San Jose incurs to produce each unit are Holton’s variable cost of $12. Fixed costs per unit to Holton with the recent purchase of equipment are $5. If San Jose would prefer to negotiate a transfer price between the divisions, what range of transfer prices would be used? (Points : 6)
A) $12–$16
B) $12–$17
C) $12–$18
D) $16–$18
Explanation / Answer
The transfer price per unit fro holten's should not be more than the market price per unit that is $16 and it should not be less than variable cost per unit that is $12. So its range should be $12-$16.
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