Trimble Crane, Inc. has a number of divisions, including the Palm Division, a producer of hydraulic pumps, and Acer Division, a manufacturer of motors.
Palm Division produces the h20-model pump that can be used by Acer Division in the production of motors that regulate the raising and lowering of the Motors's crane derrick. The market price of the h20-model is $694, and the full cost of the h20-model is $540.
Required:
1. If Trimble Crane, Inc. has a transfer pricing policy that requires transfer at full cost: What will the transfer price be? Do you suppose that Palm Division and Acer Division will choose to transfer at that price?
Acer Division
Palm Division
2. If Trimble Crane, Inc. has a transfer pricing policy that requires transfer at market price: What would the transfer price be? Do you suppose that Palm Division and Acer Division would choose to transfer at that price?
Acer Division
Palm Division
3. Now suppose that Trimble Crane, Inc. allows negotiated transfer pricing and that Palm Division can avoid $120 of selling expense by selling to Acer Division.
Which division sets the minimum transfer price? What is the minimum transfer price?
Which division sets the maximum transfer price? What is the maximum transfer price?
Do you suppose that Palm Division and Acer Division would choose to transfer somewhere in the bargaining range?