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 260,000 260,000

Number of units being sold to outside customers 260,000 235,000

Selling price per unit to outside customers $ 66 $ 49

Variable costs per unit $ 31 $ 35

Fixed costs per unit (based on capacity) $ 8 $ 6

Division Y:

Number of units needed for production 25,000 25,000

Purchase price per unit now being paid to an outside supplier $ 61 $ 48

Required:

1-a. Refer to the data in case A above. Assume that $4 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?

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.