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 (ROI). Assume the following information relative to the two divisions Case Alpha Division: Capacity in units Number of units now being sold to 58,000 308,000110,000 209,000 86,000 209,000 45 outside customers Selling price per unit to outside 58,000 308, 000 customers Variable costs per unit Fixed costs per unit (based on $ 102 $ 63 $ 41 $ 19 $ 69 $ 42 $ 29 capacity) 29 $ 10 $ 25 $ Beta Division: 9,100 67,000 19,000 58,000 Number of units needed annually Purchase price now being paid to an outside supplier 93 $ 38 $ 69* "Before any purchase discount. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated

Explanation / Answer

1.

a. Lowest acceptable TP from alpha view point = Selling price to out siders – opportunity cost = 102-6 = $96.

b. Highest acceptable TP from Beta view point = Existing purchase price from outsider = $93

c. With the above range details there will be no possible TP range.

2.

a. Lowest acceptable TP from alpha view point = Selling price to out siders – opportunity cost =41-6 = $35.

b. Highest acceptable TP from Beta view point = Existing purchase price from outsider =40.

c. Range min – 35 to max – 40. Yes the managers will agree for TP if it is within the range.

d. Potential loss of profits for company as a whole =67000*2 = 134000.

3.

a. Because the Alpha division is having Excess capacity = 108000-84000 = 24000

Lowest acceptable TP from alpha view point = Variable cost =42.

b. Highest acceptable TP from Beta view point = Existing purchase price from outsider =69.

c. Range min – 42 to max – 69. Yes the managers will agree for TP if it is within the range.

d.Increases.

4.

Lowest TP from alpha division view = Variable cost + Contribution per unit*29000/58000 = 26 + (45-29)*29000/58000 = $34.

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