In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

Required:
1. Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intra company sales.
a. What is the lowest acceptable transfer price from the perspective of the selling division?
b. What is the highest acceptable transfer price from the perspective of the buying division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place? Explain.
2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intra company sales.
a. What is the lowest acceptable transfer price from the perspective of the selling division?
b. What is the highest acceptable transfer price from the perspective of the buying division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place? Explain.

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Case DivisionX: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) 200,000 200,000 $90 $70 $13 200,000 160,000 $75 $60 Division Y Number of units needed for production Purchase price per unit now being paid 40,000 40,000 to an outside supplier $86 $74