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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 280,000 280,000
Number of units being sold to outside customers 280,000 248,000
Selling price per unit to outside customers $ 68 $ 51
Variable costs per unit $ 37 $ 31
Fixed costs per unit (based on capacity) $ 10 $ 8
Division Y:
Number of units needed for production 32,000 32,000
Purchase price per unit now being paid to an outside supplier $ 63 $ 50

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.

Transfir Price=

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.

Transfer price=

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?

The trasnfer price can be a lowest of and a highest of

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