Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own divisions return on investment (ROI).

Question

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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:

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 $2 per unit in commissions on any sales to Beta Division. Will the managers agree to a transfer, and if so, within what range will the transfer price be? Explain.

2.         Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division.

(a)        Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain.

(b)        Assume that Alpha Division offers to sell 30.000 units to Beta Division for $88 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 8% price discount from the outside supplier.

(a)        Will the managers agree to a transfer? If so, what is the range within which the transfer price would be?

(b)        Assume that Beta Division offers to purchase 20,000 units from Alpha Division at $60 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why?

4.         Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 120.000 units of a different product from the one that Alpha Division is now producing. The new product would require $21 per unit in variable costs and would require that Alpha Division cut back production of its present product by 45,000 units annually. What is the lowest acceptable transfer price from Alpha Division’s perspective?

Case 2 3 4 Alpha Division: Capacity in units 80,000 400,000 | 150,000 300,000 Number of units now being sold to outside customers 80,000 400,000 100,000 300,000 $30 $90 $75 Selling price per unit to outside customers $50 $18 $65 Variable costs per unit $40 $26 S6 $15 S9 Fixed costs per unit (based on capacity) $20 Beta Division: 5,000 30,000 Number of units needed annually 20,000 120,000 $89 Purchase price now being paid to an outside supplier S27 S75*