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 $210,000210,000$

Number of units being sold to outside customers $210,000190,000$

Selling price per unit to outside customers $ $61$ $ $43$

Variable costs per unit $ $31$ $ $30$

Fixed costs per unit $($based on capacity$)$ $ $8$ $ $6$

Division Y:

Number of units needed for production $20,00020,000$

Purchase price per unit now being paid to an outside supplier $ $55$ $ $42$

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.

$1-$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?