Alpha and Beta are divisions within the same company. The managers of both divis

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 2 4 Alpha Division: Capacity in units Number of units now being sold to 51,000 283,000 110,000 194,000 outside customers Selling price per unit to outside 51,000 283,000 85,000 194,000 44 $ customers Variable costs per unit Fixed costs per unit (based on 96 $ 58 $ 68 45 $ 46 32 capacity) 22 $ 13 $ 27 $ 7 Beta Division: 21,000 Number of units needed annually Purchase price now being paid to 10,100 75,000 60,000 an outside supplier 89 $ 42 $ 68* "Before any purchase discount. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated

Explanation / Answer

2. a. Lowest acceptable transfer price from the perspective of Alpha Division = Variable Cost + Contribution Margin on Lost Sales = $ ( 24 - 5) + [$ ( 44 -24) x 75,000] / 75,000 = $ 19 + $ 20 = $ 39.

b.The highest acceptable transfer price from the perspective of Beta Division = $ 42.

c. Range of acceptable transfer prices =Between $ 39 and $ 42

d. Both managers should be better off with any transfer price within the above range. However, in all probability, they might disagree about the exact transfer price. The manager of Alpha Division would push for a transfer price of $ 42, while the manager of Beta Division would be pushing for $ 39.

e. Loss in potential profits for the company as a whole = $ ( 42 - 39) x 75,000 = $ 225,000.

3. a. Lowest acceptable transfer price from the perspective of Alpha Division = $ 45.

b. Highest acceptable transfer price from the perspective of Beta Division = $ 63.24

c. The range of acceptable transfer prices lies between $ 45 and $ 63.24.

d. The respective managers should be able to reach an agreement provided that they are rational and cooperative.

e. ROI = Profit Margin x Asset Turnover = Net Operating Profit / Sales x Sales / Assets.

ROI will increase as the selling division has enough idle capacity to cater to the needs of the buying division. Therefore, no additional investment in operating assets would be required. Hence the Asset turnover should increase.

Profit margin should also increase as there would be additional contribution margin of $ ( 58.24 - 45) x 21,000 = $ 278,040.

4. Lowest acceptable transfer price for Alpha Division = $ 27 + [$ ( 46 - 32) x 30,000 ] / 60,000 = $ 34

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