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What will be the best transfer price of product x

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Reference no: EM132955662

The Alpha Division of the Beta Berhad manufactures product X at a variable cost of RM40 per unit. Alpha Division's fixed costs, which are sunk, are RM20 per unit. Product X is saleable in a competitive market where the market price of product X is RM70 per unit.

On the other hand, Gamma Division of Beta Berhad uses product X to make product Y. The variable costs to convert X to Y are RM20 per unit and the fixed costs, which are sunk, are RM10 per unit. The product Y sells for RM80 per unit.

Required:

Problem i. Both Alpha and Gamma divisions are to be treated as a profit center. What will be the best transfer price of product X that the divisional managers should choose in order to ensure that Beta Berhad's profit will be maximized?

Problem ii. Given that the price from part (a) above is chosen as the transfer price of Product X. What should the divisional manager of the Gamma Division do?

Problem iii. Suppose there is no market price for product X. What transfer price should be used for decentralized decision-making?

Problem iv. If it is assumed that there is no market for product X, will the operations of the Gamma Division be profitable?

Reference no: EM132955662

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