In Cases 1 to 3 below, assume that Division A has a product that can be sold either to Division B of the same company or to outside customers. The managers of both divisions are evaluated based on their own divisions 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			4
Division A:
Capacity in units		50,000			300,000			100,000			200,000
Number of units now being sold to outside customers		50,000			300,000			75,000			200,000
Selling price per unit to outside customers	$	100		$	40		$	60		$	45
Variable costs per unit	$	63		$	19		$	35		$	30
Fixed costs per unit (based on capacity)	$	25		$	8		$	17		$	6
Division B:
Number of units needed annually		10,000			70,000			20,000			60,000
Purchase price now being paid to an outside supplier	$	92		$	39		$	60	*

*Before any purchase discount.

Required: 1. Refer to Case 1. A study has indicated that Division A can avoid $5 per unit in variable costs on any sales to Division B.

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

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

c. Will the managers agree to a transfer?

multiple choice 1

• Yes

• No

3. Refer to Case 3. Assume that Division B is now receiving a 5% price discount from the outside supplier.

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

a-2. What is the range of transfer price the manager's of both divisions should agree?

a-3. It is assumed that managers are co-operative and understand their own business. Will the managers agree to a transfer?

multiple choice 2

• Yes

• No