Selling Price per unit on the outside market $40

Variable cost per unit $21

Fixed costs per unit (based on capacity) $9

Capacity in Units 60,000

Samson Company has a Motor Divison 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. Samson Company evaluates its division managers on the basis of divisional profits.

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 te lowest acceptable transfer price for transformers sold to the Motor Division?

b) From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division?

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? Why or Why not?

d) From the standpoint of the entire company, should a transfer take place? Why or Why not?

2. Assume that the Electrical Division is now selling to outside customers all of the transformers it can produce.

a) From the standpoint of the Electrical Division, what is te lowest acceptable transfer price for transformers sold to the Motor Division?

b) From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division?

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? Why or Why not?

d) From the standpoint of the entire company, should a transfer take place? Why or Why not?