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Problem 11-25 (Algo) Basic Transfer Pricing [LO11-3] Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on thesr own division's return on invesiment (RO0). Assume the foliowing information relative to the two divisions: Required: 1. Refer to case 1 shown above. Alpha Division can ovold $2 per unit in commissions on any sales to Beta Division. a. What is Alpho Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (ff any) between the two divisions? Wal the managers probably agree to a transfer? 2. Refer to case 2 shown above. A study indicates that Alpha Division can avold $5 per unit in shipping costs on any sales to Beta Division. a. What is Alpha Division's lowest acceptable transfer price? b. What is Eleta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement botween the two divisional maagers over what the exact transfer price should be? 'Before any purchase discount. Required: 1. Refer to case 1 shown above. Alpha Division can avoid $2 per unit in commissions on any saies to Beta Division. a. What is Alpha Division's lowest acceptable transfer price? b. What is Beto Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division: a. What is Alpha Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be? d. Assume Alpha Division offers to sell 305,000 units to Beta Division for $98 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 3. Refer to case 3 shown above. ssume that Beta Division is now receiving an 8% price discount from the outside supplier. a. What is Alpha Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? d. Assume Beta Division offers to purchase 25,000 units from Alpha Division at $85 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 121,000 units of a different product from the one Alpha Division is producing now. The new product would require $31 per unit in variable costs and would require that Alpha Dlvision cut back production of its present product by 45,375 units annually. What is Alpha Division's lowest acceptable transfer price? Complete this question by entering your answers in the tabs below. 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division. a. What is Alpha Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be? d. Assume Alpha Division offers to sell 305,000 units to Beta Division for $98 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? Case 11-26 (Algo) Transfer Pricing; Divisional Performance [LO11-3] Weller Industries is a decentralized organization with six divisions. The company's Electrical Division produces a variety of electrical items, including on 52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $10.40 each; the fitting has a variable manufacturing cost of $5.35. The company's Brake Division has asked the Electrical Division to supply it with a large quantity of 52 fittings for only $8.40 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being buit by the Brake Division follows: Although the $8.40 price for the 52 fitting represents a substantial discount from the regular $10.40 price, the manager of the Brake Division believes the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard "through the grapevine" that the airplane manufacturer plans to reject his bid if it is more than $59 per brake unit. Thus, if the Brake Division is forced to pay the regular $10.40 price for the 52 fitting, it will either not get the contract or it will sutfer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Weller industries uses return on investment (ROI) to measure divisional performance. Required: 1. Assume that you are the manager of the Electrical Division. a. What is the lowest acceptable transfer price for the Electrical Division? b. Would you supply the X52 fitting to the Brake Division for $8.40 each as requested? 2. Assuming the airplane brakes can be sold for $59, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Electrical Division supplies fittings to the Brake Division? 3. In principle, within what range would the transfer price lie? (For all requirements, enter your "Financial Disadvantage" amounts as a negative value and round your final answers to 2 decimal places.) a time when it is already operating at only 50% of capacity. I he manager of the Brake bivision argues that the price concession is imperative to the well-being of both his division and the company as a whole. Weller Industries uses return on investment (ROI) to measure divisional performance. Required: 1. Assume that you are the manager of the Electrical Division. a. What is the lowest acceptable transfer price for the Electrical Division? b. Would you supply the X52 fitting to the Brake Division for $8.40 each as requested? 2. Assuming the airplane brakes can be sold for $59, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Electrical Division supplies fittings to the Brake Division? 3. In principle, within what range would the transfer price lie? (For all requirements, enter your "Financial Disadvantage" amounts as a negative value and round your final answers to 2 decimal places.)