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

Question

In each of the cases below, assume that 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) 250,000250,000 250.000220,000 $48 $28 S7 $65 337 $9 Division Y Number of units needed for production 30,000 30,000 Purchase price per unit now being paid to an outside supplier $60 $47 Required 1-a. Refer to the data in case A above. Assume that $2 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division. ransfer efer price 1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place? Yes ?No 2-a. Refer to the dats in case B above. In this case there wil be no reduction in variable seling costs on ntracompany seles. Detemine the transfer price of the selling duision Transfer price 2-b. if the managers are free to negotate and make cecisions on their own will a transter take place? Yes l No 2-c. What is the range of transfer price the managers of bon civisions should gree? The transfer price can be s lowest ofl and a highest of

Explanation / Answer

1-a.

working:

1-b.

No.

because the price charged by selling division is $63, the price charged by outsider is $60, so buying division will prefer buying from outside supplier.

2-a.

since, there is excess capacity the minimum transfer price to be charged will be equal to the variable cost per unit, i.e $28.

2-b.

Yes.

(since the price charged by outside supplier is $47, which is greater than the price that can be charged by selling division i.e $28).

2-c.The transfer price can be a lowest of $28 and a highest of $47.

transfer price $

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