Alpha and Beta are divisions within the same company. The managers of both divis
ID: 2580985 • Letter: A
Question
Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division's return on investment (ROI). Assume the following information relative to the two divisions Case 4 Alpha Division: Capacity in units Number of units now being sold to 54,800 313,00e 108,800 202,000 84,800 202,00e 45 outside customers Selling price per unit to outside 54,000 313,000 customers Variable costs per unit Fixed costs per unit (based on 97 $ 58 69 43 25 32 6 19,000 66,00e capacity) 23 $ 13 $ 26 $ Beta Division: Number of units needed annually Purchase price now being paid to 9,300 72,0e an outside supplier 89 $ 41 $ 69* 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 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? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be? d. Assume Alpha Division offers to sell 72,000 units to Beta Division for $40 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 7% price discount from the outside supplier. 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? d. Assume Beta Division offers to purchase 19,000 units from Alpha Division at $59.17 per unit. If Alpha Division accepts this price would you expect its ROl to increase, decrease, or remain unchanged? 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 66,000 units of a different product from the one Alpha Division is producing now. The new product would require $29 per unit in variable costs and would require that Alpha Division cut back production of its present product by 33,000 units annually. What is the lowest acceptable transfer price from Alpha Division's perspective?Explanation / Answer
1.a. Lowest Acceptable Price = $97
1.b. Highest Acceptable Price = $89
1.c.There is no range of acceptable transfer price. Managers won't be agree to a transfer.
2.a. Lowest Acceptable Price = $44 - $5 = $39
2.b. Highest Acceptable Price = $41
2.c. Acceptable transfer price range = $39 - $41. There will be no disagreement between two divisional managers.
2.d. Loss in potential profits for the company = ($2 x 72,000)
........................................................................= $144,000
3.a. Lowest Acceptable Price = $43
3.b. Highest Acceptable Price = ($69 x 93%)
.................................................= $64.17
3.c. Acceptable transfer price range = $43 - $64.17. There will be no disagreement between two divisional managers.
3.d. ROI will remain unchanged. But the profit will be at its optimum level.
4.a. Lowest acceptable transfer price = {[($45 - $32) x 33,000] + (66,000 x $29)} / 66,000
............................................................= ($429,000 + $1,914,000) / 66,000
............................................................= $35.5 per unit
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