Question

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 58,000 294,000 105,000 193,000 58,000 294,000 81,000 193,000 Alpha Division: Capacity in units Number of units now being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) Beta Division: Number of units needed annually Purchase price now being paid to an outside supplier $ $ 102 $ 63 $ 27 $ 10,600 92 $ 42 $ 20 $ 11 $ 74,000 39$ 65 $ 47 40 $ 30 22 $ 9 19,00€ 60,000 65* - $ *Before any purchase discount. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Required: 1. Refer to case 1 shown above, Alpha Division can avoid $6 per unit in commissions on any sales to Beta Division. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be? d. Assume Alpha Division offers to sell 74,000 units to Beta Division for $38 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole?

I need a help to slove #2 (d) which is potential loss on profit. Thank you!

Answer 1

Alpha Division
Particulars	Sale to
	Outside customers	Beta Division
Selling price	42	38
Variable cost	20	15
Contribution	22	23
If the Beta Division refuses to purchase from Alpha division then there will be a contribution loss of $ 1 to Alpha Division and also increase in cost of purchase for Beta Division by $ 1
So, total potential loss of profit to the company
	=74,000*2
	= 1,48,000