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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 250,000 250,000
Number of units being sold to outside customers 250,000 220,000
Selling price per unit to outside customers $ 65 $ 48
Variable costs per unit $ 37 $ 28
Fixed costs per unit (based on capacity) $ 9 $ 7
Division Y:
Number of units needed for production 30,000 30,000
Purchase price per unit now being paid to an outside supplier $ 60 $ 47

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.

transfer price = ?

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?

lowest=?, highest=?

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