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 | 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=?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started