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 53,000 292,000 102,000 200,000

Number of units now being sold to

outside customers 53,000 292,000 79,000200,000

Selling price per unit to outside

customers $96 $39 $63 $44

Variable costs per unit$60$19$40$29

Fixed costs per unit (based on

capacity) $21 $5 $20 $5

Beta Division:

Number of units needed annually 10,600 73,000 18,000 62,000

Purchase price now being paid to

an outside supplier $90 $36 $63*

*Before any purchase discount.

Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated.

Required:

Refer to case 2 shown above. A study indicates that Alpha Division can avoid $6 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 73,000 units to Beta Division for $35 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole?