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

108,000

101,000

Number of units being sold to outside customers

108,000

79,000

Selling price per unit to outside customers

$57

$30

Variable costs per unit

$23

$17

Fixed costs per unit (based on capacity)

$7

$5

Division Y:

Number of units needed for production

22,000

22,000

Purchase price per unit now being paid to an outside supplier

$50

$34

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?

	No
	Yes