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 1 year ago

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