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 division's ROL The managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Treat each case Independently: Division A: Capacity in units Number of units now being sold to outside customers Selling price per unit to outside customers Variable costs per unit Division B: Fixed costs per unit (based on capacity) Number of units needed annually Purchase price now being paid to an outside supplier Case 50,000 50,000 300,000 100,000 200,000 300,000 75,000 200,000 100 $ 40 $ 60 $ 45 63 $ 19 $ 35 $ 30 $ 25 $ 8 $ 17 $ 6 10,000 70,000 20,000 60,000 $ 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? Minimum transfer price b. What is the maximum transfer price for Division B? Maximum transfer price c. Will the managers agree to a transfer? O Yes O No 2. Refer to Case 2. Assume that Division A can avoid $4 per unit in variable costs on any sales to Division B. a-1. What is the minimum transfer price for Division A? Minimum transfer price a-2. What is the maximum transfer price for Division B? Maximum transfer price a-3. It is assumed that managers are co-operative and understand their own business. Would you expect any disagreement between the two divisional managers over what the transfer price should be? Yes O No Pray 4 of 4 # Next Seved b. 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? Loss in potential profits 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? Minimum transfer price a-2. What is the range of transfer price the manager's of both divisions should agree? The transfer price can be a lowest of and a highest of a-3. It is assumed that managers are co-operative and understand their own business. Will the managers agree to a transfer? O Yes www. < Prev 4 of 4 Next > Help