Question

In: Accounting

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 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 53,000 302,000 108,000 206,000
Number of units now being sold to
outside customers
53,000 302,000 84,000 206,000
Selling price per unit to outside
customers
$ 97 $ 42 $ 67 $ 45
Variable costs per unit $ 58 $ 21 $ 41 $ 29
Fixed costs per unit (based on
capacity)
$ 23 $ 12 $ 24 $ 7
Beta Division:
Number of units needed annually 10,300 67,000 18,000 60,000
Purchase price now being paid to
an outside supplier
$ 89 $ 40 $ 67 *

*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 $6 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 67,000 units to Beta Division for $39 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. 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 $57.98 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decreas

e, 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 Alpha Division is producing now. The new product would require $25 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?

Solutions

Expert Solution

Solution 1A to 1C
A Lowest Acceptable tranfer price 91 (Selling price to Outside customers - $6)
B Highest Acceptable tranfer price 89 (Purchases price now paid to outside supplier)
C There is not a range of acceptable transfer Prices No range
Will the managers agree to the trade? No
Solution 2A to 2D
A Lowest Acceptable tranfer price 38 (Selling price to Outside customers - $4)
B Highest Acceptable tranfer price 40 (Purchases price now paid to ouside supplier)
C There is a range of acceptable transfer Prices 38 to 40
Will the managers agree to the trade? Yes
D Loss in potential profits of the company 134000 ($40-38)*67000
Solution 3A to 3D
A Lowest Acceptable tranfer price 41 (Variable cost per unit)
B Highest Acceptable tranfer price 62.98 (67*94%)
C There is a range of acceptable transfer Prices 41 to 62.98
Will the managers agree to the trade? Yes
D Division A's ROI should Increase
Solution 4:
Lowest acceptable transfer price
Contribution margin lost on present product 480000 [($45- $29)*30000]
Variable cost of New product 1500000 (60000*$25)
Total Cost 1980000
/ Units of new product 60000
Lowest acceptable transfer price 33.00

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