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	200,000	200,000
Number of units being sold to outside customers	200,000	160,000
Selling price per unit to outside customers	$90	$75
Variable costs per unit	$70	$60
Fixed costs per unit (based on capacity)	$13	$8
Division Y:
Number of units needed for production	40,000	40,000
Purchase price per unit now being paid to an outside supplier	$86	$74

4.

value: 2.00 points

Required information

Required:

1-a.	Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales.

1-b.

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

	Yes
	No

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5.

value: 2.00 points

Required information

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.

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