In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

Case

A B

Division X:

Capacity in units

Number of units being sold to outside customers

Selling price per unit to outside customers $ $

Variable costs per unit $ $

Fixed costs per unit based on capacity $ $

Division Y:

Number of units needed for production

Purchase price per unit now being paid to an outside supplier $ $

Exercise Algo Part

Required:

Refer to the data in case A above. Assume in this case that $ per unit in variable selling costs can be avoided on intracompany sales.

a What is the lowest acceptable transfer price from the perspective of the selling division?

b What is the highest acceptable transfer price from the perspective of the buying division?

c What is the range of acceptable transfer prices if any between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?