Question
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
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 | 120,000 | 120,000 | ||
Number of units being sold to outside customers | 120,000 | 96,000 | ||
Selling price per unit to outside customers | $ | 52 | $ | 36 |
Variable costs per unit | $ | 40 | $ | 12 |
Fixed costs per unit (based on capacity) | $ | 10 | $ | 8 |
Division Y: | ||||
Number of units needed for production | 24,000 | 24,000 | ||
Purchase price per unit now being paid to an outside supplier | $ | 48 | $ | 35 |
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.
Transfer Price -
1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?
multiple choice
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?
Transfer Price -
multiple choice
Yes
No
2-c. What is the range of transfer price the managers of both divisions should agree?
The Transfer price can be lowest of --- and highest of ----
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