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 51,000 286,000 107,000 197,000 51,000 286,000 84,000 197,000 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 $ $ 98 $ 60 $ 39 $ 20 $ 61 $ 37 $ 43 26 $ 21 $ 5 $ 18 $ 3 9,900 73,000 18,000 62,000 $ 92 $ 39 $ 61% *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 $3 per unit in shipping costs on any sales to Beta Division. a. What is Alpha Division's lowest acceptable transfer price? Complete this question by entering your answers in the tabs below. Req 1A to 1C Req 2A to 2D Req 3A to 3D Req 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 84 Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices. There a range of acceptable transfer prices as shown below: Transfer price s s Will the managers agree to the trade? Yes No Req 1A to 1C Reg 2A to 2D Req 3A to 3D Reg 4 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $3 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 73,000 units to Beta Division for $38 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 A 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 a range of acceptable transfer prices as shown below: Transfer price $ Will the managers agree to the trade? Yes No Loss in potential profits for the company Ren 1A to 10 Reg 3A to 3D 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 3% 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 18,000 units from Alpha Division at $54.17 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): There is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below: Transfer price
