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