US Pumps is a multidivisional firm that manufactures and installs
US Pumps is a multidivisional firm that manufactures and installs chemical piping and pump systems. Its valve division makes a single standardized valve. The valve division and installation division currently are 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 of $40 per pump has been set through a negotiation process between the two divisions and with the involvement of senior management. The installation division has received a bid from an outside value manufacturer to supply it with an equivalent valve for $35 each.,
The valve?s division?s manager has argues that if it is forced to meet the external price of $35 it will l ose money on internal sales.,
The operating data for the last year for the valve division follow:,
Operating Statement-Last year,
To Installation Division To Outside,
Salas 20k@ $40 $800,000 20,000 @ $60,
Variable cost @ $30 (600,000) (600,000),
Fixed Cost (135,000) (135,000),
Gross margin $ 65,000 $465,000,
Analyze the situation and recommend a course of action. What should the installation division managers do? What should the valve division managers do? In your opinion, what should the US Pumps senior manager do? ,
This question was answered on: Dec 18, 2020
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