Reference no: EM132528058

Alpha and Beta 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               2                  3                       4

Alpha Division:

Capacity in units         53,000        292,000     102,000       200,000

Number of units now being sold to

outside customers       53,000        292,000       79,000        200,000

Selling price per unit to outside

customers                     $96           $39        $63                   $44

Variable costs per unit      $60        $19          $40                     $29

Fixed costs per unit (based on

capacity)                      $21        $5              $20                     $5

Beta Division:

Number of units needed annually 10,600   73,000    18,000        62,000

Purchase price now being paid to

an outside supplier             $90               $36             $63*              -

Before any purchase discount.

Required

Refer to case 3 shown above. Assume that Beta Division is now receiving an 3% price discount from the outside supplier.

Question a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?

Question b. What is the highest acceptable transfer price from the perspective of the Beta Division?

Question c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

Question d. Assume Beta Division offers to purchase 18,000 units from Alpha Division at $56.11 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged?