Reference no: EM132529476

Point 1: Division A of Jindal and Co., is the only source of supply for an intermediate product, IPRO, that can potentially be converted by Division B into a finished product, FPRO. There is no outside market for IPRO. If A decides to produce IPRO, it can produce 60,000 units per month after spending variable costs of $12.00 per unit. As an alternative, without any change in its monthly fixed costs, it can produce and sell (in the outside market) 60,000 units per month of a new product, ANPRO, for a contribution of $8 per unit. The above two options are the only opportunities available to A.

Point 2: If Division B decides to convert IPRO into FPRO, it will need one unit of IPRO to manufacture one unit of FPRO and it can then sell 60,000 units of FPRO at a selling price of $48 per unit after spending an additional $10 per unit in variable costs. As an alternative, without any change in its monthly fixed costs, B can produce and sell 40,000 units per month of a new product, BNPRO, using components bought from outside, for a contribution of $21 per unit. Again, assume that these are the only two opportunities that B has.

Question 1: Now assume a decentralized setup where both divisions are evaluated as profit centers. The minimum transfer price per unit of IPRO from A's point of view and the maximum transfer price from B's point of view, respectively, are:

Option 1: $17 and $21

Option 2: $20 and $18

Option 3: $20 and $17

Option 4: $20 and $24

Option 5: $12 and $24

Option 6: $10 and $17