Problem 11A-6 Basic Transfer Pricing [LO11-5] 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 3 4 58,000 301,000 104,000 193,000 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 Before any purchase discount. 58,000 $102 $65 $25 301,000 $43 $20 $10 79,000 $62 $35 193,000 $47 $32 $7 $21 9,100 72,000 22,000 62,000 $96 $43 $62* Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Required: 1. Refer to case 1 shown above. Alpha Division can avoid $3 per unit in commissions on any sales to Beta Division. a. What is the minimum transfer price for Alpha Division? X Answer is not complete. 0 Variable cost per unit Less: Avoidable cost Total contribution margin of total capacity No. of units transferred x 0 Transfer price 0 b. What is the maximum transfer price for Beta Division? Maximum transfer price c. Will the managers agree to a transfer? ONO OYes 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $4 per unit in shipping costs on any sales to Beta Division. a-1. What is the minimum transfer price for Alpha Division? X Answer is not complete. Variable cost per unit 0 Less: Avoidable cost Sales value of total capacity No. of units transferred Transfer price 0 0 a-2. What is the maximum transfer price for Beta Division? Maximum transfer price a-3. Would you expect any disagreement between the two divisional managers over what the transfer price should be? ONO Yes b. Assume that Alpha Division offers to sell 72,000 units to Beta Division for $42 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? Loss in potential profits for the company 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 4% price discount from the outside supplier. a-1. What is the minimum transfer price for Alpha Division? Answer is not complete. Variable cost per unit Sales value of total capacity No. of units transferred Transfer price 0 0 a-2. What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.) The lowest transfer price would be and the highest transfer price would be a-3. Will the managers agree to a transfer? Yes ONO b. Assume that Beta Division offers to purchase 22,000 units from Alpha Division at $54.52 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Division A's ROI should 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 62,000 units of a different product from the one that Alpha Division is now producing. 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 31,000 units annually. What is the lowest acceptable transfer price from Alpha Division's perspective? Answer is not complete. Variable cost per unit Total contribution margin on lost sales No. of units transferred 0 Transfer price 0.00
