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=?