PROBLEM 11A-6 Basic Transfer Pricing [L011-5) Alpha and Beta are divisions within the same company. The managers of both divisions are eva ated based on their own division's return on investment (ROI). Assume the following informa relative to the two divisions: Performance Measurement in Decentralized Organizations Case 2 300.000 150,000 30.000 400.000 80,000 530 $18 $6 400.000 $90 $65 $15 100,000 $75 $40 $20 300,000 $50 $26 $9 un now be sold to outside AUTO customers 120,000 20.000 30,000 per unit capacity 5,000 $75 ily d to an outside $27 $89 wounts be now y purchased are free to desde if they will participate in any internal transfers. All transfer prices transfer price be? Explain pro case I shown above. Alpha Division can avoid $2 per unit in commissions on any Beta Division. Will the managers agree to a transfer, and if so, within what range will pealer so case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in Lipping costs on any sales to Beta Division Would you expect any disagreement between the two divisional managers over what the atsfer price should be? Explain. Assume that Alpha Division offers to sell 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? leder to case 3 shown above. Assume that Beta Division is now receiving an 8% price dis- cast from the outside supplier. . Will the managers agree to a transfer? If so, what is the range within which the transfer price would be? Assume that Beta Division offers to purchase 20,000 units from Alpha Division at $60 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why? Idler to case 4 shown above. Assume that Beta Division wants Alpha Division to provide i 120.000 units of a different product from the one that Alpha Division is now producing Division cut back production of its present product by 45,000 units annually. What is the los Ne new product would require $21 per unit in variable costs and would require that Alpt tacceptable transfer price from Alpha Division's perspective? 11-7 Before any Managers are free to they will participate in any internal transfers. Alter we gotiated. Required 1. Refer to case I showa obove. Alpha Division can avoid 52 per unit in commissions on any sales to Beta Division. Will the managers agree to a transfer, and if so, within what range will 2 Refer to case 2 shown above. A Study indicates that Alpha Division can avoid SS per unit in shipping costs on any sales to Beta Division the transfer price be? Explain. Screen AL TV b. Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain. Assume that Alpha Division offers to sell 30,000 units to Beta Division for 588 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 8% price dis- count from the outside supplier. Will the managers agree to a transfer? If so, what is the range within which the transfer price would be? b. Assume that Beta Division offers to purchase 20,000 units from Alpha Division at $60 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why? 4. Refer to ease 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 120,000 units of a different product from the one that Alpha Division is now producing, The new product would require $21 per unit in variable costs and would require that Alpha Division cut back production of its present product by 45,000 units annually. What is the low- est acceptable transfer price from Alpha Division's perspective? Transfer Pricing: Divisional Performance (L011-5) lized organization with six divisions. The company's Electrical Divi- line an X52 electrical fitting. The Electrical Divi- lur customers for $7.50 each: the 2 3 Apa Division: Number of units now being sold to outside city in units customers 80,000 400,000 150,000 300,000 80,000 400,000 100,000 300,000 $30 $90 $75 $50 $18 $65 $40 $26 $6 $15 $20 Seing price per unit to outside customers Vouble costs per unit $9 Faxed costs per unit (based on capacity). A Division 5,000 30,000 20,000 120,000 Purchase on now being paid to an outside Number of units needed annually $27 $89 $75 supplier Jefore any discount. to decide if they will participate in any internal transfers. All transfer prices Managers negotiated quired Refer to case I shown above. Alpha Division can avoid $2 per unit in commissions on any sales to Beta Division. Will the managers agree to a transfer, and if so, within what range will the transfer price be? Explain. 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. 2 Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain. Assume that Alpha Division offers to sell 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 1 Refer to case 3 shown above. Assume that Beta Division is now receiving an 8% price dis- count from the outside supplier. 2 Will the managers agree to a transfer? If so, what is the range within which the transfer price would be? Assume that Beta Division offers to purchase 20,000 units from Alpha Division at $60 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why? Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 120,000 units of a different product from the one that Alpha Division is now producing. Division cut back production of its present product by 45,000 units annually. What is the low- Dhe new product would require $21 per unit in variable costs and would require that Alpha at acceptable transfer price from Alpha Division's perspective