Question

PROBLEM 131-4 Base Transfer Pricing |LDE] Alpha and Beta are divisions within the same company. The managers of both divisions are evalu ated based on their own division's return on investment (ROD). Assume the following information relative to the two divisions Case 400.000 400.000 150.000 100,000 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. .... B0,000 90.000 $30 $18 300 000 300,000 $50 $26 $75 $65 540 $15 $9 5,000 30,000 120,000 20,000 $75 $27 $09 "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 le case shown above. Ainha Division can avoid $2 per unit in commissions on any sales.to Beta Division. Will the managers agree to a transfer, and if so, within what range will the transfer price be? Explain. 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 Bela Division. Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain.

Answer 1

Below answer based on Transfer pricing - It is price when one division transfer goods and services to other division of the same company . there are multiple mechanism to fix the transfer price

Answer 1	There will be No transfer
	A division
	from the view point of selling division
	Transfer price (Greater Than Equal to ) Variable cost per unit + ( Total contribution Margin on Lost sales /Number of unit transferred)
	it is given that Variable cost per unit $18
	commission is $2 ( A division can ignore the same)
	Selling price per unit-$ 30/ unit
	Number of units
	Transfer price (Greater Than Equal to )
	($18-$2) + ((30-18)*5000/5000)	28
	Transfer price (Greater Than Equal to )$/ Unit	28
	B division
	from the view point of Buying division
	Transfer price (Less than Equal) cost of buying form outside supplier	27
	There fore A division will not accept less than $ 28
	and B division will not pay more than $27
	There fore NO Transfer

Answer 2 a)
	Disagreement between the two divisional Manager
	A division
	from the view point of selling divison
	Transfer price (Greater Than Equal to ) Variable cost per unit + ( Total contribution Margin on Lost sales /Number of unit transferred)
	Transfer price (Greater Than Equal to )$/ unit	85
	($65-$5) + ((90-65)*30000/30000)
	B division
	from the view point of Buying divison
	Transfer price (Less than Equal) cost of buying form outside supplier	89
	No Disagreement ,in fact the agreement possible
	within the range of
	Transfer Price >equal to $85 and <equal to $ 89