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 divisions return on investment (ROI) Assume the following information relative to the two divisions Case 1 2 3 4 Alpha Division Capacity in units 58,000 308,000 103,000 197,000 Number of units now being sold to outside customers 58,000 308,000 79,000 197,000 Selling price per unit to outside customers $100 $41 $61 $43 Variable costs per unit $62 $19 $34 $29 Fixed costs per unit (based on capacity) $26 $11 $18 $5 Beta Division Number of units needed annually 10,100 75,000 17,000 60,000 Purchase price now being paid to an outside supplier $94 $40 $61 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 $3 per unit in commissions on any sales to Beta Division a What is the minimum transfer price for Alpha Division b What is the maximum transfer price for Beta Division c Will the managers agree to a transfer No Yes 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 a 2 What is the maximum transfer price for Beta Division a 3 Would you expect any disagreement between the two divisional managers over what the transfer price should be No Yes b Assume that Alpha Division offers to sell 75,000 units to Beta Division for $39 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 7 price discount from the outside supplier a 1 What is the minimum transfer price for Alpha Division a 2 What is the range of transfer price the manager's of both divisions should agree (Round your answers to 2 decimal places ) a 3 Will the managers agree to a transfer Yes No b Assume that Beta Division offers to purchase 17,000 units from Alpha Division at $51 73 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 that Alpha Division is now producing The new product would require $26 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 the lowest acceptable transfer price from Alpha Divisions perspective

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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

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 divisions return on investment (ROI). Assume the following information relative to the two divisions:

	Case
	1	2	3	4
Alpha Division:
Capacity in units	58,000	308,000	103,000	197,000
Number of units now being sold to outside customers	58,000	308,000	79,000	197,000
Selling price per unit to outside customers	$100	$41	$61	$43
Variable costs per unit	$62	$19	$34	$29
Fixed costs per unit (based on capacity)	$26	$11	$18	$5
Beta Division:
Number of units needed annually	10,100	75,000	17,000	60,000
Purchase price now being paid to an outside supplier	$94	$40	$61*

* 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 $3 per unit in commissions on any sales to Beta Division.

a.	What is the minimum transfer price for Alpha Division?

b.	What is the maximum transfer price for Beta Division?

c.	Will the managers agree to a transfer?

	No
	Yes

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?

a-2.	What is the maximum transfer price for Beta Division?

a-3.

Would you expect any disagreement between the two divisional managers over what the transfer price should be?

	No
	Yes

b.	Assume that Alpha Division offers to sell 75,000 units to Beta Division for $39 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 7% price discount from the outside supplier.

a-1.	What is the minimum transfer price for Alpha Division?

a-2.	What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.)

a-3.

Will the managers agree to a transfer?

	Yes
	No

b.	Assume that Beta Division offers to purchase 17,000 units from Alpha Division at $51.73 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged?

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 that Alpha Division is now producing. The new product would require $26 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 the lowest acceptable transfer price from Alpha Divisions perspective?