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?