In each of the cases below, assume that 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 280,000 280,000 Number of units being sold to outside customers 280,000 248,000 Selling price per unit to outside customers $68 $51 Variable costs per unit $37 $31 Fixed costs per unit (based on capacity) $10 $8 Division Y: Number of units needed for production 32,000 32,000 Purchase price per unit now being paid to an outside supplier $63 $50

Required: 1-a. Refer to the data in case A above. Assume that $3 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division.

1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

multiple choice 1 Yes No

2-a. Refer to the data in case B above. In this case there will be no reduction in variable selling costs on intracompany sales. Determine the transfer price of the selling division.

2-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

multiple choice 2 Yes No

2-c. What is the range of transfer price the managers of both divisions should agree?