Alpha and Beta are divisions within the same company. The managers of both divis
ID: 2468744 • Letter: A
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
Refer to case 1 shown above. Alpha Division can avoid $4 per unit in commissions on any sales to Beta Division.
What is the maximum transfer price for Beta Division?
Refer to case 2 shown above. A study indicates that Alpha Division can avoid $6 per unit in shipping costs on any sales to Beta Division.
What is the minimum transfer price for Alpha Division?
What is the maximum transfer price for Beta Division?
Would you expect any disagreement between the two divisional managers over what the transfer price should be?
Assume that Alpha Division offers to sell 74,000 units to Beta Division for $33 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole?
Refer to case 3 shown above. Assume that Beta Division is now receiving an 5% price discount from the outside supplier.
What is the minimum transfer price for Alpha Division?
What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.)
Assume that Beta Division offers to purchase 19,000 units from Alpha Division at $53.90 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged?
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 that Alpha Division is now producing. The new product would require $26 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 the lowest acceptable transfer price from Alpha Division’s perspective?
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:
Explanation / Answer
Solution 1a, b and c:
As there is no spare capacity in Alpha division, therefore
minimum transfer price for Alpha Division = $102 - $4 = $98
maximum transfer price for Beta Division = Purchase price paid to outside supplier = $94
As maximum transfer price for Beta division is lower than minimum transfer price of alpha division therefore, managers will not agree for transfer.
Solution 2a1, a2 and a3:
As there is no spare capacity in Alpha division, therefore
minimum transfer price for Alpha Division = $38 - $6 = $32
maximum transfer price for Beta Division = Purchase price paid to outside supplier = $34
As maximum transfer price for Beta division is higher than minimum transfer price of alpha division therefore, managers may agree for transfer.Therefore There is no disagreement between the two divisional managers over what the transfer price should be.
Solution 2b:
If Alpha Division offers to sell 74,000 units to Beta Division for $33 per unit and that Beta Division refuses this price then Beta division will purchase from outside supplier at the rate of $34 per unit.
Loss in potential profits for the company as a whole = ($34 - $32) * 74000 = $148,000
Solution 3a1, a2 and a3:
As there is spare capacity in Alpha division, therefore
minimum transfer price for Alpha Division = Variable cost per unit = $37
maximum transfer price for Beta Division = Purchase price paid to outside supplier = $62*95% = $58.90
As maximum transfer price for Beta division is higher than minimum transfer price of alpha division therefore, managers may agree for transfer.
Solution 3b:
If Alpha division accept the transfer price fo $53.90 then Alpha division will have additional sale of 19000 units by incurring variable cost of $37 per unit resulting in overal increase in operatin income of Alpha division and its ROI will also increase.
Solution 4:
Contribution margin per unit for alpha division = $47 - $32 = $15 per unit
As there is no spare capacity in Alpha division, therefore
minimum transfer price for Alpha Division for 64000 units = Variable cost for 64000 units + Loss of contribution margin on 32000 units
= 64000 * $26 + 32000 * $15 = $2,144,000
Minimum transfer price per unit = $2,144,000 / 64000 = $33.50
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.