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). Assume the following information relative to the two divisions:

	Case
	1	2	3	4
Alpha Division:
Capacity in units	50,000	293,000	107,000	196,000
Number of units now being sold to outside customers	50,000	293,000	81,000	196,000
Selling price per unit to outside customers	$97	$42	$69	$47
Variable costs per unit	$59	$21	$43	$33
Fixed costs per unit (based on capacity)	$21	$9	$27	$8
Beta Division:
Number of units needed annually	9,400	70,000	22,000	66,000
Purchase price now being paid to an outside supplier	$89	$40	$69*

* 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 $5 per unit in commissions on any sales to Beta Division.

a.	What is the minimum transfer price for Alpha Division?

b.	What is the maximum transfer price for Beta Division?

c.	Will the managers agree to a transfer?

	Yes
	No

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-1.	What is the minimum transfer price for Alpha Division?

a-2.	What is the maximum transfer price for Beta Division?

a-3.

Would you expect any disagreement between the two divisional managers over what the transfer price should be?

	Yes
	No

b.	Assume that Alpha Division offers to sell 70,000 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 4% price discount from the outside supplier.

a-1.	What is the minimum transfer price for Alpha Division?

a-2.	What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.)

a-3.

Will the managers agree to a transfer?

	No
	Yes

b.	Assume that Beta Division offers to purchase 22,000 units from Alpha Division at $61.24 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged?

4.

Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 66,000 units of a different product from the one that Alpha Division is now producing. The new product would require $30 per unit in variable costs and would require that Alpha Division cut back production of its present product by 33,000 units annually. What is the lowest acceptable transfer price from Alpha Divisions perspective?

References

eBook & Resources

WorksheetDifficulty: 2 MediumLearning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.

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