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 58,000 316,000 106,000 201,000 58,000 $102 $66 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 201,000 $46 $29 $63 $25 $8 316,000 82,000 $38 $17 $39 $6 $23 66,000 20,000 $39966 62,000 10,800 $93 - * Before any purchase discount. 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 $5 per unit in commissions on any sales to Beta Division. a. What is the minimum transfer price for Alpha Division? 58 Variable cost per unit Less: Avoidable cost Total contribution margin on lost sales No. of units transferred Transfer price b. What is the maximum transfer price for Beta Division? Maximum transfer price 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-1. What is the minimum transfer price for Alpha Division? Transfer price 2 a-2. What is the maximum transfer price for Beta Division? Maximum transfer price b. Assume that Alpha Division offers to sell 66,000 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? Loss in potential profits for the company 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 6% price discount from the outside supplier. a-1. What is the minimum transfer price for Alpha Division? Transfer price 2