Alpha and Beta are divisions within the same company. The managers of both divis

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 (ROn, Assume the following information relative to the two divisions 3 Alpha Division: Capacity in units Number of units now being sold to 53,800 294,e00 18,800 204,880 outside customers Selling price per unit to outside 53,800 294,000 83,00 204,8e0 custoners Variable costs per unit Fixed costs per unit (based on $ 143 $ 39 $ 19 5 61 S 5 $29 64 $ capacity) Beta Divisian: 9,200 70,000 19,000 66,e00 Number of units needed annually Purchase price now being paid to an outside suppller $ 95 37 61 "Before any purchase discount Managers are free to decide if the will participate in any intermal transfers All transfer prices are Required: 1. Refer to case 1 shown above. Alpha Division can avoid $4 per unit in commissions on any sales to Beta Division a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? will the managers probably agree to a transfer?

Explanation / Answer

CASE 1    Contribution per unit = Selling price per unit - variable cost per unit = $103 - $64    =$39 Variable cost saving = $64 - $4 = $60 Transfer price = variable cost per unit + ( total contribution margin given up on lost sales/ units trfd) a) transfer price = $60 + 39* 9200/9200= $99 b) contribtuon margin was $39 now under transfer             $39          ( $99 - $60) Thus indifferent to selling outside or transfer BETA div cost per unit purchased outside                 $95 cost per unit of trfd                                         $99 Div b manager would reject                         $4    higher price c) no the managers will not agree as Alpha will not want anything less than $99 and beta will not pay any thing more than $95 CASE2 contribution per unit = $39-$19 = $20 a,Transfer pricing = ( $19- $4 saving in shipping cost ) + 20 = $35 Alpha is earning same contribution as earlier $35 - $15 = $20 hence indifferent BETA   Cost per unit if purchased         $37 transfer price                               $35 Saving of thus $2 c) the managers should agree Alpha sells 70,000 units to beta div for $36 per unit potential loss = 70,000 * $2= $140,000 ( since A will lose $1 since it could have got $37 at which beta purchase from outside - and Beta will have to pay $ 1 more since it can get the samae at $35 from Alpha ) CASE3 Beta is recieving 5% price discount = $61 @95% = $57.95 Div A   Transfer price = $35 + 0 = $35 since no contribution is lost Alpha no difference BETA DIV cost per unint if purchased outsied              $57.95 transfer price                                                           $35.00 Saving in cost                                                           $22.95 b) BETa div offet to purchase 19000 units from Alpha at $52.95 benefit to whole company 19000 * 22.95 = $504900 Alpha $52.95 - $35 = $17.95 contribution     =     $17.95 * 19000 = $341050) Effect on ROI = Division income will increase by $ 341,050 with no changes in investmetn , thus ROI will increase BETA=( 57.95 - 52.95 = 5 *19000 = 95000 CASE4   66000 units .; 25 variable cost ; 33000 units capacity reduction transfer price = $25 + ( $15 * 33000/66000) = $25 +$7.50 = $32.50

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