U.S. Pump is a multidivisional firm that manufactures and installs chemical piping and pump systems.
The valve division makes a single standardized valve. The valve division and the installation division are currently involved in a transfer pricing dispute. Last year, half of the valve division’s output was sold to the installation division for $40 and the remaining half was sold to outsiders for $60.
The existing transfer price has been set at $40 per pump through a process of negotiation between the two divisions, with the involvement of senior management. The installation division has received a bid from an outside valve manufacturer to supply it with an equivalent valve for $35 each.

The manager of the valve division has argued that if it is forced to meet the external price of $35, it will lose money on selling internally.
The operating data for last year for the valve division are as follows:

Analyze the situation and recommend a course of action. What should installation division managers do? What should valve division managers do? What should U.S. Pump’s senior managers do?

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Sales Variable costs Allocated fixed costs Gross margin VALVE DIVISION Operating Statement Last Year To Installation Division 20,000 @ $40 20,000 @ $30 $800,000 (600,000) (135,000) $ 65,000 To Outside 20,000 @ $60 $1,200,000 (600,000) (135,000) $ 465,000