Question

The Atlantic Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,400. Division A charges division B market price for the part, which is $1,450 per unit. Variable costs are $1,020 and $1,240 for divisions A and B, respectively.

The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit.

Compare the contribution margins under three different alternatives. Assume that division A can sell in the open market only 470 of the 940 units it can produce every month, at $1,450 per unit. Assume also that a 20% reduction in price is necessary to sell all 940 units each month. Assume transfers are made and the price is maintained.

Alternatives		Contribution Margin
Maintain price and no transfers		$
Cut price and no transfers		$
Maintain price and transfers		$

Should transfers be made?

Yes or No

If so, how many units should the division transfer and at what price?

Units transferred			units
Price within the range		$	to $

Answer 1

Answer 1

Division B's contribution margin	$(290)	2400 - 1450 - 1240
Company's contribution margin	$ 140	2400 - 1020 - 1240

Answer 2

No.	This is because Division A will charge a minimum of Market price, which results in loss.
Transfer Price	$                           -

Answer 3

Alternatives	Contribution margin	Calculations
Maintain price and no transfers	$                   202,100	(1450 - 1020) * 470
Cut price and no transfers	$                   131,600	940* ((1450 * (1-0.2)) - 1020)
Maintain price and transfers	$                   267,900	((1450 - 1020) * 470) + ((940 - 470) * (2400 - 1020 - 1240))

Answer 4

Should transfers be made	YES
Units transferred	470
Price range	$ 1,020	$ 1,160

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