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: Division X: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) Division Y: Number of units needed for production Purchase price per unit now being paid to an outside supplier Transfer price $ 51 Yes No $ $ $ A 130,000 130,000 53 $ 38 $ 11 $ $ Case 1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place? 130,000 110,000 20,000 50 $ B 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. 38 15 9 20,000 37

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 evatuated based on their divisional profits: 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? 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? Yes No 2-c. What is the range of transfer price the managers of both divisions should agree