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 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 27 18 55 $ 24 $ Division Y: 17,000 17,000 Number of units needed for production Purchase price per unit now being paid to an outside supplier 49 $ 36 Required 1. 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 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?

Explanation / Answer

1a Lowest acceptable transfer price = 55-2 = $53 b Highest acceptable transfer price =$49

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