The Atlantic Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,350. Division A charges division B market price for the part, which is $1,350 per unit. Variable costs are $1,020 and $1,150 for divisions A and B, respectively.

The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit.

1

Compare the contribution margins under three different alternatives. Assume that division A can sell in the open market only 450 of the 900 units it can produce every month, at $1,350 per unit. Assume also that a 20% reduction in price is necessary to sell all 900 units each month. Assume transfers are made and the price is maintained.

Alternatives Contribution Margin

Maintain price and no transfers = $

Cut price and no transfers= $

Maintain price and transfers= $

Should transfers be made?

If so, how many units should the division transfer and at what price?

Units transferred_____ units

Price within the range ____$ to _____$