In each of the cases below, assume Division X has a product that can be sold eit
ID: 2513965 • Letter: I
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: 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) 109,000 109,000 109,000 91,000 50 $ 28 $ 16 Division Y: Number of units needed for production Purchase price per unit now being paid 18,000 18, 000 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
a) The lowest transfer price acceptable to the selling division is $(50-4) = $46. Since it can sellall that it produces to outside market, it will transfer it to other department at $46 which will generate same profits.
b) The higheest transfer price acceptable to the buying department is $42, the same rate at which it buys from external market.
c)The selling department would like to sell at range of $46 &above. The buying department would buy at $42 & below. Since they both are mutually exclusive,no transfer would be taking place.
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