Question

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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		B
Division X:
Capacity in units		98,000		105,000
Number of units being sold to outside customers		98,000		83,000
Selling price per unit to outside customers	$	56	$	25
Variable costs per unit	$	29	$	12
Fixed costs per unit (based on capacity)	$	8	$	5
Division Y:
Number of units needed for production		22,000		22,000
Purchase price per unit now being paid to an outside supplier	$	47	$	24

Exercise 11A-3 Part 1

Required:

1. Refer to the data in case A above. Assume in this case that $4 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?

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?

Exercise 11A-3 Part 2

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?

Answer 1

	Solution 1A to 1C
A	Lowest Acceptable Transfer price	52	(Selling price to Outside customers - $4)
B	Highest Acceptable Transfer price	47	(Purchases price now paid to outside supplier)
C	There is not a range of acceptable transfer Prices	No range
	Will the managers agree to the trade?	No

	Solution 2A to 2C
A	Lowest Acceptable Transfer price	12	(Variable cost per unit)
B	Highest Acceptable Transfer price	24.00	(Purchases price now paid to outside supplier)
C	There is a range of acceptable transfer Prices	12 to 24
	Will the managers agree to the trade?	Yes