In each of the cases below, assume that 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 B Division X: Capacity in units 103,000 94,000 Number of units being sold to outside customers 103,000 78,000 Selling price per unit to outside customers $ 53 $ 33 Variable costs per unit $ 26 $ 14 Fixed costs per unit (based on capacity) $ 8 $ 4 Division Y: Number of units needed for production 16,000 16,000 Purchase price per unit now being paid to an outside supplier $ 47 $ 28 In each of the cases below, assume that 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 B Division X: Capacity in units 103,000 94,000 Number of units being sold to outside customers 103,000 78,000 Selling price per unit to outside customers $ 53 $ 33 Variable costs per unit $ 26 $ 14 Fixed costs per unit (based on capacity) $ 8 $ 4 Division Y: Number of units needed for production 16,000 16,000 Purchase price per unit now being paid to an outside supplier $ 47 $ 28 Required:
1-a. Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales.
Variable Cost per unit:
Less avoidabe cost:
Total Contribution Margin on lost sales:
No. of units transferred:
Transfer price:
2-a. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. Determine the transfer price of the selling division.
2-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?
2-c. What is the range of transfer price the managers of both divisions should agree? The lowest transfer price would be ______ and the highest transfer price would be______.
Expert Answer