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		51,000		286,000		109,000			192,000
Number of units now being sold to outside customers		51,000		286,000		85,000			192,000
Selling price per unit to outside customers	$	100	$	42	$	66		$	48
Variable costs per unit	$	63	$	20	$	43		$	32
Fixed costs per unit (based on capacity)	$	24	$	8	$	23		$	9
Beta Division:
Number of units needed annually		9,400		70,000		18,000			64,000
Purchase price now being paid to an outside supplier	$	92	$	41	$	66	*		—

*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 lowest acceptable transfer price from the perspective of the Alpha Division?

b. What is the highest acceptable transfer price from the perspective of the Beta Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $4 per unit in shipping costs on any sales to Beta Division.

a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?

b. What is the highest acceptable transfer price from the perspective of the Beta Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be?

d. Assume Alpha Division offers to sell 70,000 units to Beta Division for $40 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 5% price discount from the outside supplier.

a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?

b. What is the highest acceptable transfer price from the perspective of the Beta Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

d. Assume Beta Division offers to purchase 18,000 units from Alpha Division at $57.70 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 64,000 units of a different product from the one Alpha Division is producing now. The new product would require $27 per unit in variable costs and would require that Alpha Division cut back production of its present product by 32,000 units annually. What is the lowest acceptable transfer price from Alpha Division’s perspective?

Answer 1

Question 1
a. Lowest acceptable price from perspective of Aplha division
Alpha division can transfer minimum at a price of its cost.
Cost in Alpha division
Variable cost	63
less: savings in selling commission	-5
Net Variable cost	58
Fixed cost	24
Lowest acceptable price from perspective of Aplha division	82
b. Highest acceptable price from perspective of Beta division
Beta division can accept transfer at a price not more than the price paid to outside supplier
Hence, the highest acceptable price from perspective of Beta division is 92
C. Range of acceptable offers
The lower range of transfer price is the lowest acceptable price from perspective of Aplha division, i.e, 82
The highest range of transfer price is the highest acceptable price from perspective of Beta division, i.e, 92
The Aplhadivision manager may not agree for internal transfer since he can sell the same product to Outsider for $100 even thiugh he incurrs commission on sales of $ 5
Question 2
a. Lowest acceptable price from perspective of Aplha division
Alpha division can transfer minimum at a price of its cost.
Cost in Alpha division
Variable cost	20
less: savings in shipping costs	-4
Net Variable cost	16
Fixed cost	8
Lowest acceptable price from perspective of Aplha division	24
b. Highest acceptable price from perspective of Beta division
Beta division can accept transfer at a price not more than the price paid to outside supplier
Hence, the highest acceptable price from perspective of Beta division is 41
C. Range of acceptable offers
The lower range of transfer price is the lowest acceptable price from perspective of Aplha division, i.e, 24
The highest range of transfer price is the highest acceptable price from perspective of Beta division, i.e, 41
The Aplhadivision manager may not agree for internal transfer since he can sell the same product to Outsider for $100 even thiugh he incurrs shipping costs of $ 4
d. There will no loss for the company in internal transfers as the company can sell the product to outsiders,if the product has been refused by another division