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Answer this using Managerial Accounting only . (Please do not use finance/ cost accounting) In case 1-3 below, assume that Division A has a product
Answer this using Managerial Accounting only. (Please do not use finance/ cost accounting)
In case 1-3 below, assume that Division A has a product that can sold either to Division B of the same company or to outside customers. The managers of both divisions are evaluated based on their own division's return on investment (ROI). The managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Treat each case independently - Case 1 2 3 Division A: Capacity in units 50,000 300,000 100,000 Number of units now being sold to 50,000 300,000 75,000 outside customers Selling price per unit on the outside $100 $40 $60 market Variable costs per unit $63 $19 $35 Fixed costs per unit (based on $25 $8 $17 capacity) Division B: Number of units needed annually 10,000 70,000 20,000 Purchase price now being paid to $92 $39 $60* an outside supplier *Before quantity discount Required: a) Refer to case 1 above, a study has indicated that Division A can avoid $5 per unit in variable cost on any sales to Division B. Will the managers agree to a transfer and if so, within what range will the transfer price be? Explain. b) Refer to case 2 above. Assume that Division A can avoid $4 per unit in variable costs on any sales to Division B. (1) Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain. (ii) Assume that Division A offers to sell 70,000 units to Division B for $38 per unit and that Division B refuses this price. What will be the loss in potential profits for the company as a whole? c) Refer to case 3 above. Assume that Division B is now receiving a 5% quantity discount from the outside supplier. ( Will the managers agree to transfer? If so, within what range will the transfer price be? (ii) Assume that Division B offers to purchase 20,000 units from Division A a: $52 per unit. If Division A accepts this price, would you expect its ROI to increase, cecrease or remain unchanged? WhyStep by Step Solution
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