In each of the cases below, assume Division X has a product that can be sold eit

Question

In each of the cases below, assume 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 Division X: 109,000 109,000 109,000 91,000 Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) 50 $ 28 $ 16 Division Y: 18,000 18,000 Number of units needed for production Purchase price per unit now being paid to an outside supplier 42 $ 32 Exercise 11A-3 Part 1 Required: 1. Refer to the data in case A above. Assume in this case that $4 per unit in variable selling costs can be avoided on intracompany sales a. What is the lowest acceptable transfer price from the perspective of the selling division? b. What is the highest acceptable transfer price from the perspective of the buying division? c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?

Explanation / Answer

In Case A: There is no additional capacity

1A

Lowest acceptable price from seller perspective?

Since there is no additional capacity exists minimum acceptable transfer price will be "Selling price to outsiders" that is $50 per unit

Ans

$50

1B

Highest acceptable price from Buyer perspective?

Highest price from buyer perspective will be "purchase price from outside supplier" that is $42

Ans

$42

1C

There is not a range of acceptable transfer prices
Reason: transfer price from seller perspective $50 & Buyer perspective $42

Are the managers likely to agree on transfer prices

Ans

No

In Case A: There is no additional capacity

1A

Lowest acceptable price from seller perspective?

Since there is no additional capacity exists minimum acceptable transfer price will be "Selling price to outsiders" that is $50 per unit

Ans

$50

1B

Highest acceptable price from Buyer perspective?

Highest price from buyer perspective will be "purchase price from outside supplier" that is $42

Ans

$42

1C

There is not a range of acceptable transfer prices
Reason: transfer price from seller perspective $50 & Buyer perspective $42

Are the managers likely to agree on transfer prices

Ans

No

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