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		109,000				101,000
Number of units being sold to outside customers		109,000				83,000
Selling price per unit to outside customers	$	53			$	35
Variable costs per unit	$	25			$	16
Fixed costs per unit (based on capacity)	$	7			$	6
Division Y:
Number of units needed for production		18,000				18,000
Purchase price per unit now being paid to an outside supplier	$	48			$	32

Required:

1-a. Refer to the data in case A above. Assume in this case that $1 per unit in variable selling costs can be avoided on intracompany sales.

Variable cost per unit 25

Less:Avoidable Cost 1 24

Total Contribution margin on lost sales ?

No. of units transferred 18,000

Transfer price (greater than or equal to) 24

1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

	Yes
	No

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		109,000				101,000
Number of units being sold to outside customers		109,000				83,000
Selling price per unit to outside customers	$	53			$	35
Variable costs per unit	$	25			$	16
Fixed costs per unit (based on capacity)	$	7			$	6
Division Y:
Number of units needed for production		18,000				18,000
Purchase price per unit now being paid to an outside supplier	$	48			$	32

2-a. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. Determine the transfer price of the selling division

Variable Cost Per Unit ?

Total Contribution Margin on Sales ?

No. of units transferred ?

Transfer Price (greater than or equal to) ?

2-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

	No
	Yes

2-c. What is the range of transfer price the managers of both divisions should agree?

The lowest transfer price would be ? and the highest transfer price would be ?

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