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

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 A. 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 95,000 109,000 78, 000 55 $ 27 24 $18 Division Y: Number of units needed for production Purchase price per unit now being paid 17,000 17,000 to an outside supplier 49 $ 36 2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs 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

Ans. Case A Case B (a) Lowest acceptable transfer price 30 18 (b) Highest acceptable transfer price 49 27 ( c) Range of acceptable transfer price 30-49 18-27 Note: In the case A, it is beneficial for the company 'not to transfer' the product and purchase of product for division Y at 49. Note: In the case B, there is a possibility of intradivision transfer of product between the range of 18-27

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