r11 Homework Help Save &Exit; Check my w Aipna and seta are divisions witnin tne
ID: 2541184 • Letter: R
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r11 Homework Help Save &Exit; Check my w Aipna and seta are divisions witnin tne same company Ine managers of botn aivisions are evaluated pased on tneir own division s return on investment (RO) Assume the following information relative to the two divisions Alpha Divisions Capacity in unite Number of units now being sold to Selling price per wnit to outside Variable costs per unit 56,000289,000 103,000 199,000 56,000 289,000 78,000 199,000 69 44 $ 9843 62 22 s Pixed eosts per unit (based on capaeity) 22 10 26 Number of units needed annually Purehase price now being paid to 10,200 74,00019,00062,00 140 S69 an outside supplier "Before any purchase discount Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated Required: 1 Refer to case 1 shown above. Alpha Division can avoid $5 per unit in commissions on any sales to Beta Division a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfee price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices if any) between the two divisions? Would you expect any disagreement between the twn divisinnal mananers ower what the eart transfer nrice should hn? 5 6 8Explanation / Answer
1. Case 1
Variable cost per unit = $ 62 - $ 5 = $ 57
a. Lowest transfer price from the perspective of Alpha Division = Variable Cost + ( Opportunity Cost of Lost Contribution from Regular Orders) / Number of Units Transferred = $ 57 + [$ ( 98 - 62) x 10,200] / 10,200 = $ 93
b. Highest acceptable transfer price from the perspective of Beta Division is the price at which it is currently bying from the outside supplier : $ 91.
c. As Alpha Division will not accept less than $ 93, and Beta Division will not pay more than $ 91, no negotiation is possible, and there will be no transfer.
2. Case 2.
Variable cost per unit for Alpha Division for transfers to Beta Division = $ 22 - $ 5 = $ 17.
a. Lowest acceptable transfer price from the perspective of Alpha Division = $ 17 +[ 74,000 x $ ( 43 - 22) ] / 74,000 = $ 38.
b. Highest acceptable transfer price from the perspective of Beta Division = $ 40.
c. Range of acceptable transfer price : $ 38 < Transfer Price < $ 40.
Disagreement is possible. Alpha Division might be arguing for $ 40, while Beta Division for $ 38.
b.
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