Finance Staff Review
In the course of arbitrating this transfer price dispute, the finance staff asked the purchasing staff to review
the outside market situation for the thermostatic control unit. The purchasing staff replied that there was
excess capacity and that, as a result of this, prices were very soft. Eventually, the prices would rise—either
when the demand for comparable units increased or when some of the suppliers went out of business. The
purchasing staff had no doubt that the Refrigeration Division could purchase all its requirements for the
next year or two at $2.15 a unit, or even less. The purchasing staff, however, believed that if all the
corporation’s requirements for this unit were placed with outside suppliers, the price would rise to at least
$2.40 because this action would dry up the excess capacity.