Chapter 24, Problem 21TI

Sheffield Company manufactures power tools. The Electric Drill Division (an investment center) can purchase the motors for the drills from the Motor Division (another investment center) or from an outside vendor. The cost to purchase from the outside vendor is $20. The Motor Division also sells to outside customers. The motor needed by the Electric Drill Division sells for $25 to outside customers and has a variable cost of $15. The Motor Division has excess capacity.

If Sheffield Company allows division managers to negotiate transfer prices, what is the minimum amount the manager of the Motor Division should consider?