Alpha and Beta are divisions within Gamma Manufacturing Company. Gamma evaluates the management of both segments based on their own return on investment. The following information presents four different transfer pricing scenarios for the two segments. Review each scenario independently and answer the questions posed: Scenario 1: Case 1 2 3 Alpha Division Capacity in units. Number of units now being sold to outside customers. Selling price per unit to outside customers. Variable costs per unit... Fixed costs per unit (based on capacity) Beta Division: Number of units needed annually. Purchase price now being paid to an outside supplier.. "Before any purchase discount. 80,000 80,000 $30 $18 $6 400,000 400,000 $90 $65 $15 150.000 100,000 $75 $40 $20 300,000 300,000 $50 $26 $9 120,000 5,000 $27 30,000 $89 20,000 $75 Gamma management allows each segment to decide if they will participate in any internal transfers and to negotiate the transfer prices. Required: Scenario 1. Alpha Segment can avoid $2 per unit in sales commissions if it sells to Beta Segment. Will management of Alpha and Beta agree to a transfer, and if so, within what range will the transfer price be? Explain. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Scenario 2: Case 1 2 3 Alpha Division: Capacity in units... Number of units now being sold to outside customers.. Selling price per unit to outside customers.. Variable costs per unit Fixed costs per unit (based on capacity) Beta Division: Number of units needed annually... Purchase price now being paid to an outside supplier.. "Before any purchase discount 80,000 80,000 $30 $18 $6 400.000 400,000 $90 $65 $15 150.000 100,000 $75 $40 $20 300,000 300,000 $50 $26 $9 120,000 5,000 $27 30.000 $89 20.000 $75 1 2. See Scenario 2. Assume that the Alpha Segment can avoid $5 per unit in variable costs on sales to Beta Segment. a. Are Alpha and Beta likely to agree to an internal transfer sale that would improve Gamma's overall profitability? If so, what would be the acceptable selling price range per unit? b. Assume Alpha Segment offers Beta 30,000 units for $88 per unit. If Beta refuses this price, what is the loss in potential profits for the Gamma Company as a whole? Scenario 3: Case 1 2 3 4 80,000 80,000 $30 $18 $6 Alpha Division: Capacity in units... Number of units now being sold to outside customers.. Selling price per unit to outside customers. Variable costs per unit .... Fixed costs per unit (based on capacity) Beta Division: Number of units needed annually... Purchase price now being paid to an outside supplier.. *Before any purchase discount 400,000 400,000 $90 $65 $15 150.000 100,000 $75 300,000 300,000 $50 $26 $9 $40 $20 120,000 5,000 $27 30.000 $89 20.000 $75 100 See Scenario 3. Assume Beta Segment has negotiated an 8% price discount on the $75 list price from its outside supplier. a. Are the managers of Alpha and Beta likely to agree to a transfer? If so, what is the acceptable range of transfer prices? b. Beta Segment offers Alpha $60 per unit for 20,000 units. Assuming Alpha Segment accepts this offer, will its ROI increase, decrease, or remain unchanged? Why
