[The following information applies to the questions displayed below.]

In each of the cases below, assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

	Case
	A	B
Division X:
Capacity in units	100,000	100,000
Number of units being sold to outside customers	100,000	80,000
Selling price per unit to outside customers	$50	$35
Variable costs per unit	$30	$20
Fixed costs per unit (based on capacity)	$8	$6
Division Y:
Number of units needed for production	20,000	20,000
Purchase price per unit now being paid to an outside supplier	$47	$34

References

Section BreakExercise 12A-1 Transfer Pricing Situations [LO12-5]

1.

value: 0.75 points

Required information

Exercise 12A-1 Part 1

Required:

1a.

Refer to the data in case A above. Assume that $2 per unit in variable selling costs can be avoided on intracompany sales. 1b. If the managers are free to negotiate and make decisions on their own, will a transfer take place? 2a. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. Determine the transfer price of the selling division. 2b. If the managers are free to negotiate and make decisions on their own, will a transfer take place? 2c. What is the range of transfer price the managers of both divisions should agree?