Question
In: Accounting
Clinton Corporation has two decentralized divisions, Alpha and Beta. Alpha always has purchased certain units from...
Clinton Corporation has two decentralized divisions, Alpha and Beta. Alpha always has purchased certain units from Beta at $95 per unit. Beta plans to raise the price to $130 per unit, the price it receives from outside customers. As a result, Alpha is considering buying these units from outside suppliers for $95 per unit. Beta’s costs follow: Variable costs per unit $ 90 Annual fixed costs $ 170,000 Annual production of these units sold to Alpha 15,000 units
Required: a. If Alpha buys from an outside supplier, the facilities that Beta uses to manufacture these units will remain idle. What will be the result if Clinton enforces a transfer price of $130 per unit between Alpha and Beta?
Clinton's contribution margin would (increase/decrease) by ?????
b. Suppose Clinton enforces a transfer price of $95 and insists that Beta sell to Alpha before selling to outside customers. Beta currently operates at capacity and can easily sell the units it sells to Alpha on the outside market. What cost will Clinton incur as a result of this policy?
Solutions
Expert Solution
Ans:
A. As a result of this policy the Clinton company will loss the contribution margin
Contribution Margin = (Selling price – variable cost) * Number of units
= (95 – 90) * 15000
= $ 75,000 Decrease
B.The cost incurred by Clinton by following this policy is Opportunity cost which is cost of forgone opportunity.
Opportunity cost = (Outside selling price – Transfer price) Number of units
=(130–95) * 15,000 = $5,25,000.
ekkarill92 answered 2 years agoRelated Solutions
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Case
1
2
3
4
Alpha
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Capacity in
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$
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$
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Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
Alpha and Beta are divisions within the same company. The
managers of both divisions are evaluated based on their own
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information relative to the two divisions: Case 1 2 3 4 Alpha
Division: Capacity in units 57,000 291,000 101,000 200,000 Number
of units now being sold to outside customers 57,000 291,000 75,000
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Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
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managers of both divisions are evaluated based on their own
division’s return on investment (ROI). Assume the following
information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
51,000
298,000
109,000
195,000
Number of units now being sold to
outside customers
51,000
298,000
84,000
195,000
Selling price per unit to outside
customers
$
99
$
42
$
70
$
47
Variable costs per unit...
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Alpha and Beta are divisions within the same company. The
managers of both divisions are evaluated based on their own
division’s return on investment (ROI). Assume the following
information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
58,000
284,000
106,000
191,000
Number of units now being sold to
outside customers
58,000
284,000
82,000
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Selling price per unit to outside
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$
97
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$
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Variable costs per unit...
Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
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managers of both divisions are evaluated based on their own
division’s return on investment (ROI). Assume the following
information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
57,000
319,000
109,000
205,000
Number of units now being sold to
outside customers
57,000
319,000
84,000
205,000
Selling price per unit to outside
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$
103
$
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Case
1
2
3
4
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53,000
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outside customers
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282,000
80,000
200,000
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104
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44
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45
Variable costs per unit...
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managers of both divisions are evaluated based on their own
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information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
55,000
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109,000
204,000
Number of units now being sold to
outside customers
55,000
291,000
84,000
204,000
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$
102
$
40
$
62
$
47
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Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
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managers of both divisions are evaluated based on their own
division’s return on investment (ROI). Assume the following
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Case
1
2
3
4
Alpha Division:
Capacity in units
50,000
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103,000
192,000
Number of units now being sold to
outside customers
50,000
284,000
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192,000
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$
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$
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Case
1
2
3
4
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54,000
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295,000
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$
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$
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46
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