Reference no: EM132560371

Giga & Terra are divisions within the same company. The managers of both divisions are evaluated based on their own division's return on investment (ROI). Assume the following information relative to the two divisions:

                                                  Case 1                     Case 2                 Case 3                         Case 4

Giga Division

Capacity in units                                160.000                   800.000               300.000              600.000

Number of units now

being sold to outside customers              160.000                    800.000                200.000              600.000

Selling price per unit to

outside customers Rp.                             60.000 Rp.                180.000 Rp.           150.000 Rp.         100.000

Variable costs per unit Rp.                           36.000 Rp.                130.000 Rp.             80.000 Rp.       52.000

Fixed costs per unit

(based on capacity)                                  Rp. 12.000                     Rp. 30.000              Rp. 40.000     Rp. 18.000

Terra Division

Number of units

needed annually                                            10.000                           60.000               40.000             240.000

Purchase price now being

paid to an outside supplier                            Rp. 54.000                        Rp. 178.000                Rp. 150.000 (before any purchase discount)

Managers are free to decide if they will participate in any internal transfer. All transfer prices are negotiated.

Required:

Question a. Refer to case 1 (in the table) show above. Giga can avoid Rp. 4.000 per unit to commissions on any sales to Terra Division. Will the managers agree to transfer, and if so, within what range will the transfer price be? Explain.

Question b. Refer to case 2 (in the table) show above. The study indicates that Giga Division can avoid Rp. 10.000 per unit in shipping cost on any sales to Terra Division. Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain. Assume that Giga Division offers to sell 60.000 units to terra division for Rp. 176.000 per unit and that Terra Division refuses this price. What will be the loss in potential profits for the company as a whole?

Question c. Refer to case 3 (in the table) show above. Assume that Terra Division is now receiving an 8% price discount from the outside supplier. Will the managers agree to a transfer? If so, what is the range within which the transfer price would be? Explain.

Question d. Refer to case 4 (in the table) show above. Assume that Terra Divisions wants Giga Divisions to provide it with 240.000 units of a different product from the one that Giga Divisions is now producing. The new product would require Rp. 42.000 per unit in variable cost and would require that Giga Divisions cut back production of its present product by 90.000 unit annually. How to determine the lowest acceptable transfer price from Giga Division's perspective? Explain.