Nelcro Companys Electrical Division produces a highquality t

Nelcro Company\'s Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow Selling price per unit on the outside market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units $40 $21 $9 60,000 Nelcro Company has a Motor Division that would like to begin purchasing this transformer from the Electrical Division. The Motor Division is currently purchasing 10,000 transformers each year from another company at a cost of $38 per transformer. Nelcro Company evaluates its division managers on the basis of divisional profits Required: 1. Assume that the Electrical Division is now selling only 50,000 transformers each year to outside customers. a. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? Transfer pri b. From the standpoint of the Motor Digision, what is the highest acceptable transfer price for transformers acquired from the Electrical Di Transfer price c. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? O Yes O No d. From the standpoint of the entire company, should a transfer take place? Transfer should take place O Transfer should not take place

Solution

a Transfer price = $21 b Transfer price = $38 c Yes d Transfer should take place