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   1 2 3 4 Alpha Division:                   Capacity in units   54,000   316,000   107,000     203,000 Number of units now being sold to outside customers   54,000   316,000   82,000     203,000 Selling price per unit to outside customers $ 99 $ 40 $ 65   $ 46 Variable costs per unit $ 61 $ 17 $ 38   $ 32 Fixed costs per unit (based on capacity) $ 25 $ 9 $ 23   $ 8 Beta Division:                   Number of units needed annually   9,900   69,000   18,000     64,000 Purchase price now being paid to an outside supplier $ 90 $ 38 $ 65 *   —   *Before any purchase discount.   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 Alpha Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?   2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division. a. What is Alpha Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be? d. Assume Alpha Division offers to sell 69,000 units to Beta Division for $37 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 5% price discount from the outside supplier. a. What is Alpha Division's lowest acceptable transfer price? b. What is Beta Division's highest acceptable transfer price? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? d. Assume Beta Division offers to purchase 18,000 units from Alpha Division at $56.75 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 64,000 units of a different product from the one Alpha Division is producing now. The new product would require $28 per unit in variable costs and would require that Alpha Division cut back production of its present product by 32,000 units annually. What is Alpha Division's lowest acceptable transfer price

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

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
  1 2 3 4
Alpha Division:                  
Capacity in units   54,000   316,000   107,000     203,000
Number of units now being sold to
outside customers
  54,000   316,000   82,000     203,000
Selling price per unit to outside
customers
$ 99 $ 40 $ 65   $ 46
Variable costs per unit $ 61 $ 17 $ 38   $ 32
Fixed costs per unit (based on
capacity)
$ 25 $ 9 $ 23   $ 8
Beta Division:                  
Number of units needed annually   9,900   69,000   18,000     64,000
Purchase price now being paid to
an outside supplier
$ 90 $ 38 $ 65 *  
 

*Before any purchase discount.

 

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 Alpha Division's lowest acceptable transfer price?

b. What is Beta Division's highest acceptable transfer price?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

 

2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division.

a. What is Alpha Division's lowest acceptable transfer price?

b. What is Beta Division's highest acceptable transfer price?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be?

d. Assume Alpha Division offers to sell 69,000 units to Beta Division for $37 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 5% price discount from the outside supplier.

a. What is Alpha Division's lowest acceptable transfer price?

b. What is Beta Division's highest acceptable transfer price?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

d. Assume Beta Division offers to purchase 18,000 units from Alpha Division at $56.75 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 64,000 units of a different product from the one Alpha Division is producing now. The new product would require $28 per unit in variable costs and would require that Alpha Division cut back production of its present product by 32,000 units annually. What is Alpha Division's lowest acceptable transfer price?

 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps

Blurred answer
Knowledge Booster
Divisional performance management
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education