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16. Transfer Prices with Opportunity Costs - Use of Shadow Prices - LPP Applications BLACK and BROWN are two Divisions in a group of Companies and both require intermediate products Alpha and Beta which are available from Divisions A and B respectively. Black and Brown Divisions convert the Intermediate Products into Products Blackalls and Brownalis respectively. The market demand for Blackalls and Brownalls considerably exceeds the production possible, because of the limited availability of Intermediate Products Alpha and Beta. No external market exists for Alpha and Beta and no other Intermediate Product market is available to Black and Brown divisions.Other data are as follows - Division Selling Price per Processing Cost Intermediate Products required per unit unit ( ) per unit ( ) Alpha Beta Black: Blackalls 45 12 2 Brown: Brownails 54 14 2 4 3 Division A: Alpha Variable Cost 6 per unit Max production capacity 1,200 units Division B: Beta Variable Cost 4 per unit Max production capacity 1,600 units The solution to a Linear Programming Model of the situation shows that the imputed scarcity value (Shadow Price) of Alpha and Beta is * 0.50 and 2.75 per unit respectively and indicates that the Intermediate Products be transformed such that 200 units of Blackalls and 300 units of Brownalls are produced and sold. 1. Calculate the Contribution earned by the Group if the sales pattern indicated by the LPP Model is implemented. 2. Where Transfer Prices are set on the basis of Variable Cost plus Shadow Price, show detailed calculations for - (a) Contribution per unit of Intermediate Product earned by Divisions A and B and (b) Contribution per unit of Final Product earned by Black and Brown Divisions. 3. Comment on the results derived in (2) and on the possible attitude of Management of the various divisions to the proposed Transfer Pricing and product deployment policy