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	220,000	220,000
Number of units being sold to outside customers	220,000	196,000
Selling price per unit to outside customers	$62	$47
Variable costs per unit	$30	$32
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	$59	$46

Required: 1-a. Refer to the data in case A above. Assume that $2 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?