Question
Giga & Terra are divisions within the same company. The managers of both divisions are evaluated based on their own division's return on investment (ROI).
Giga & Terra 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 Case 2 Case 3 Case 4
Giga Division
Capacity in units 160.000 800.000 300.000 600.000
Number of units now
being sold to outside customers 160.000 800.000 200.000 600.000
Selling price per unit to
outside customers Rp. 60.000 Rp. 180.000 Rp. 150.000 Rp. 100.000
Variable costs per unit Rp. 36.000 Rp. 130.000 Rp. 80.000 Rp. 52.000
Fixed costs per unit
(based on capacity) Rp. 12.000 Rp. 30.000 Rp. 40.000 Rp. 18.000
Terra Division
Number of units
needed annually 10.000 60.000 40.000 240.000
Purchase price now being
paid to an outside supplier Rp. 54.000 Rp. 178.000 Rp. 150.000 (before any purchase discount)
Managers are free to decide if they will participate in any internal transfer. All transfer prices are negotiated.
Required:
a. Refer to case 1 (in the table) show above. Giga can avoid Rp. 4.000 per unit to commissions on any sales to Terra Division. Will the managers agree to transfer, and if so, within what range will the transfer price be? Explain.
b. Refer to case 2 (in the table) show above. The study indicates that Giga Division can avoid Rp. 10.000 per unit in shipping cost on any sales to Terra Division. Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain. Assume that Giga Division offers to sell 60.000 units to terra division for Rp. 176.000 per unit and that Terra Division refuses this price. What will be the loss in potential profits for the company as a whole?
c. Refer to case 3 (in the table) show above. Assume that Terra Division is now receiving an 8% price discount from the outside supplier. Will the managers agree to a transfer? If so, what is the range within which the transfer price would be? Explain.
d. Refer to case 4 (in the table) show above. Assume that Terra Divisions wants Giga Divisions to provide it with 240.000 units of a different product from the one that Giga Divisions is now producing. The new product would require Rp. 42.000 per unit in variable cost and would require that Giga Divisions cut back production of its present product by 90.000 unit annually. How to determine the lowest acceptable transfer price from Giga Division's perspective? Explain.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started