Question

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 57,000 291,000 101,000 200,000 Number of units now being sold to outside customers 57,000 291,000 75,000 200,000 Selling price per unit to outside customers $103 $40 $62 $48 Variable costs per unit $65 $21 $39 $32 Fixed costs per unit (based on capacity) $27 $10 $20 $9 Beta Division: Number of units needed annually 10,500 65,000 20,000 60,000 Purchase price now being paid to an outside supplier $95 $36 $62* — * Before any purchase discount. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Required: 1. Refer to case 1 shown above. Alpha Division can avoid $5 per unit in commissions on any sales to Beta Division. a. What is the minimum transfer price for Alpha Division? b. What is the maximum transfer price for Beta Division? c. Will the managers agree to a transfer? No Yes 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $6 per unit in shipping costs on any sales to Beta Division. a-1. What is the minimum transfer price for Alpha Division? a-2. What is the maximum transfer price for Beta Division? a-3. Would you expect any disagreement between the two divisional managers over what the transfer price should be? No Yes b. Assume that Alpha Division offers to sell 65,000 units to Beta Division for $35 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 6% price discount from the outside supplier. a-1. What is the minimum transfer price for Alpha Division? a-2. What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.) a-3. Will the managers agree to a transfer? No Yes b. Assume that Beta Division offers to purchase 20,000 units from Alpha Division at $53.28 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 60,000 units of a different product from the one that Alpha Division is now producing. The new product would require $26 per unit in variable costs and would require that Alpha Division cut back production of its present product by 30,000 units annually. What is the lowest acceptable transfer price from Alpha Division’s perspective?

Answer 1

Case 1

a.Since there is no spare capacity, minmum transfer price is equal to Selling price to outside customers – Costs avoided

= 103-$5

= $98 per unit

b.Maximum price is market price currently paid = $95

c.No

Case 2

a-1 Minimum Transfer Price = $40-$6 = $34 per unit

Maximum price = $36

Yes, as both would like to increase their income

Loss for Company = (36-34)*65000 = $130,000

Case 3

a-1 Since spare capacity, minimum transfer price = Variable cost per unit

= $39

Maximum price = 62 – 6% = $58.28

Range is $39-$58.28

Yes, will agree

Increase, as price is higher than the variable cost

4.Lowest price = Variable cost per unit + Contribution margin lost

= 26 + (48-32)/2

= $34 per unit