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 | 100,000 | 100,000 |
Number of units being sold to outside customers | 100,000 | 80,000 |
Selling price per unit to outside customers | $50 | $35 |
Variable costs per unit | $30 | $20 |
Fixed costs per unit (based on capacity) | $8 | $6 |
Division Y: | ||
Number of units needed for production | 20,000 | 20,000 |
Purchase price per unit now being paid to an outside supplier | $47 | $34 |
Required: |
1a. | Refer to the data in case A above. Assume that $2 per unit in variable selling costs can be avoided on intracompany sales. (Omit the "$" sign in your response.) |
Transfer price | $ |
1b. | If the managers are free to negotiate and make decisions on their own, will a transfer take place? | ||||
|
2a. | 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. (Omit the "$" sign in your response.) |
Transfer price | $ |
2b. | If the managers are free to negotiate and make decisions on their own, will a transfer take place? | ||||
|
2c. | What is the range of transfer price the managers of both divisions should agree? (Omit the "$" sign in your response.) |
The transfer price can be a lowest of $______ and a highest of $______ . | |
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