[The following information applies to the questions displayed below.] In each of

Question

[The following information applies to the questions displayed below.]

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.

1-a. Refer to the data in case A above. Assume in this case that $2 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division.

1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

2-a. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. Determine the transfer price of the selling division

2-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

2-c. What is the range of transfer price the managers of both divisions should agree?

Case A B Division X: Capacity in units 92,000 106,000 Number of units being sold to outside customers 92,000 89,000 Selling price per unit to outside customers $ 58 $ 28 Variable costs per unit $ 23 $ 19 Fixed costs per unit (based on capacity) $ 6 $ 6 Division Y: Number of units needed for production 17,000 17,000 Purchase price per unit now being paid to an outside supplier $ 50 $ 38

Explanation / Answer

1-a Transfer price of the selling division = 58-2 = $56 b No, transfer will not take place. 2a Transfer price of the selling division $19 b Yes, transfer will take place c The transfer price will be between $19 and $38

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