1. Huge, Inc. has many divisions that are evaluated on the basis of ROI. One div

Question

1. Huge, Inc. has many divisions that are evaluated on the basis of ROI. One division, Alpha, makes boxes. A second division, Beta, makes candy and needs 50,000 boxes per year. Alpha incurs the following costs for one box:

Direct materials

$0.20

Direct labor

0.70

Variable overhead

0.10

Fixed overhead

0.23

Total

$1.23

Alpha has capacity to make 500,000 boxes per year. Beta currently buys its boxes from an outside supplier for $1.40 each (the same price that Alpha receives).

Refer to Figure 11-5. Assume that Hugo, Inc., allows division managers to negotiate transfer price. Alpha is producing and selling 400,000 boxes. If Alpha and Beta agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?

Direct materials

$0.20

Direct labor

0.70

Variable overhead

0.10

Fixed overhead

0.23

Total

$1.23

Explanation / Answer

The minimum price of the bargaining range is the variable cost of the transferring division. The maximum is the outside price.

So 1.00 is the minimum and 1.40 is the maximum.

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