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 their own division's return on investment (ROI). Assume the following information relative to the two divisions: Case 2. 4 56,000 385, eee 105,eee 192, eee 56, eee 395, een 79,888 192,eee Alpha Division: Capacity in units Number of units now being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) Beta Division: Number of units needed annually Purchase price now being paid to an outside supplier $ $ 192 $ 65 $ 39 $ 17 $ 64 $ 41 $ 41 46 31 $ 29 $ 7 $ 21 $ $ 6 10,5ee 70, eee 20,000 60,000 $ 95 $ 37 $ 64 *Before any purchase discount. Required: 1. Refer to case 1 shown above. Alpha Division can avoid $4 per unit in commissions 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? Will the managers probably agree to a transfer? 2 Refer to case 2 shown above. A study indicates that Alpha Division can avoid $6 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 70.000 units to Beta Division for $36 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. Assume that Beta Division is now receiving an 4% 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 20.000 units from Alpha Division at $56.44 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 60.000 units of a different product from the one Alpha Division is producing now. The new product would require $27 per unit in variable costs and would require that Alpha Division cut back production of its present product by 30.000 units annually. What is Alpha Division's lowest acceptable transfer price? Complete this question by entering your answers in the tabs below. Reg 1A to 10 Req 2A to 2D Reg 3A to 3D Reg 4 1. Refer to case 1 shown above. Alpha Division can avoid $4 per unit in commissions 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? Will the managers probably agree to a transfer? Show less Identify the lowest and highest acceptable transfer prices: Lowest acceptable transfer price Highest acceptable transfer price Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below. s Transfer price s Will the managers agree to the trade? OYes No Reg 1A to 1C Reg 2A to 2D > > price? Complete this question by entering your answers in the tabs below. Req 1A to 1C Req 2A to 2D Reg 3A to 3D Reg 4 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $6 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 70,000 units to Beta Division for $36 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? Show less Identify the lowest and highest acceptable transfer prices: Lowest acceptable transfer price Highest acceptable transfer price Identify the range of acceptable transfer prices (if any) There is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below: Transfer price $ Complete this question by entering your answers in the tabs below. Req 1A to 1C Reg 2A to 2D Req 3A to 3D Req 4 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 4% 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 20,000 units from Alpha Division at $56.44 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? (Round your final answers to 2 decimal places.) Show less Identify the lowest and highest acceptable transfer prices: Lowest acceptable transfer price Highest acceptable transfer price Identify the range of acceptable transfer prices (if any): OThere is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below: Complete this question by entering your answers in the tabs below. Req 1A to 1C Reg 2A to 2D Req 3A to 3D Reg 4 Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 60,000 units of a different product from the one Alpha Division is producing now. The new product would require $27 per unit in variable costs and would require that Alpha Division cut back production of its present product by 30,000 units annually. What is Alpha Division's lowest acceptable transfer price? Show less A Lowest acceptable transfer price 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 an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $8.70 each; the fitting has a variable manufacturing cost of $4.80. The company's Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $6.70 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 built by the Brake Division follows: Purchased parts (from outside vendors) Electrical fitting X52 Other variable costs Fixed overhead and administration Total cost per brake unit $ 23.80 6.70 14.53 8.60 $ 53.63 Although the $6.70 price for the X52 fitting represents a substantial discount from the regular $8.70 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 $55 per brake unit. Thus, if the Brake Division is forced to pay the regular $8.70 price for the X52 fitting, it will either not get the contract or it will suffer 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 $6.70 each as requested? 2. Assuming the airplane brakes can be sold for $55, 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.) 1a. Lowest acceptable transfer price 16. Would you supply the X52 fitting to the Brake Division for $6.70 each as requested