Reference no: EM132590882

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

                                                                       AB                            Division X:

Capacity in units                                                100,000                       100,000

Number of units being sold to outside customers       100,000                          80,000

Selling price per unit to outside customers                 $50                               $35

Variable costs per unit                                               $30                              $20

Fixed costs per unit (based on capacity)                        $8                             $6

Division Y:

Number of units needed for production                                        20,000                     20,000

Purchase price per unit now being paid to an outside supplier          $47                               $34

Required:

Question 1-a. Refer to the data in case A above. Assume that $2 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division.

Question 1-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

Yes
No

Question 2-a. Refer to the data in case B above. In this case there will be no reduction in variable selling costs on intracompany sales. Determine the transfer price of the selling division.

Question 2-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

Yes
No

Question 2-c. What is the range of transfer price the managers of both divisions should agree?