P 5–15: U.S. Pump Systems
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
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