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 (ROl). Assume the following information relative to the two divisions Case Alpha Division: Capacity in units Number of units now being sold to 51,000 292,000 107,000 205, 000 82,000 205, 000 43 outside customers Selling price per unit to outside 51,000 292,000 customers Variable costs per unit Fixed costs per unit (based on $ 102 $ 67 $ 45 $ 25 $ 67 $ 43 $ 30 capacity) 28 $ 14 $ 23 $ Beta Division: Number of units needed annually Purchase price now being paid to 9,400 70,000 20,000 62,000 an outside supplier 94 $ 45 $ 67* "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 $4 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 $3 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 70,000 units to Beta Division for $44 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 5% price discount from the outside supplier. 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? d. Assume Beta Division offers to purchase 20,000 units from Alpha Division at $58.65 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 62,000 units of a different product from the one Alpha Division is producing now. The new product would require $26 per unit in variable costs and would require that Alpha Division cut back production of its present product by 31,000 units annually. What is the lowest acceptable transfer price from Alpha Division's perspective?

Answer 1

1	There will be no transfer
	A Division
	From the viewpoint of selling division
	Transfer price>=Variable Cost Per Unit +[Total Contribution margin on lost sales ]/number of units transferred
	It is given that variable cost per unit is 67 commission is 4 (A division to aviod commission)
	selling price per unit is 102 and the number of units needed annually
	Transfer Price >=(67-4)+(102-67)*9400/9400
		=	63+35
		$98
	B Division
	From the standpoint of the buying division
	Transfer price <=Cost of buying from outside supplier
		=	$94
	Therefore the A Division will not accept less than $98 and B Division will not pay more than $94.
	So there will be no transfer
2	a	Disagreement between the two divisional managers:
	A Division
	From the viewpoint of selling division
	Transfer Price >=Variable Cost per unit +[Total Contribution Margin on lost sales]/number of units transferred
	Transfer Price >=(25-3)+(45-25)*70000/70000
		=	$42
	B Division
	From the standpoint of buying division
	Transfer Price <=Cost of buying from outside supplier
		=	$45
	Hence the agreement is possible within range as
	$42<=Transfer Price <=50
	Therefore the both managers will be enhanced if the Transfer Price is within the range.
	b	The loss in potential profits to the company as a whole is calculated
		In reference with the given information the loss in potential profits to the company as whole is calculated
		Particulars		$
		B Division outside purchase price		45
		Less Division A variable Cost on		42
		internal transfer
		Potential Contribution margin lost to the company as a whole		3
		Potential Contribution margin and company profits foregone
		70000*3		$210,000
3	a	Transfer Take place
	A Division
	From the viewpoint of selling division
	Transfer Price >=Variable Cost per unit +[Total Contribution margin on lost sales]/Number of units transferred
	Transfer Price >=$43+0/20000
	=	$43
	B Division
	From the standpoint of the buying division
	Transfer Price <=Cost of buying from outside Supplier
	=	$67-.05*$67
	=	$63.65
	Hence the agreement is possible within range as below
	$40<=Transfer Price<=63.65
	Therefore the manager will be able to come to an agreement with a transfer price within the range
	b
	Return on investment should increase
	In reference to given information the added contribution margin is calculated
	Particulars	$
	Selling Price	$58.65
	Variable Cost	$43
	Less Contribution Margin	$16
	Added Contribution Margin	20000 units * $16
		$320,000
	A division Return on Investment should increase.The division has inactive capacity so selling 20000 units a year
	to B Division should cause no increase in the division operating assets.
	Therefore A division turnover should increase.The divisions margin should also increase.because its contribution
	margin will increase by $320000 as a consequence of the new sales with no equalizes increase in fixed costs.
4	Th lowest acceptable transfer price from A Division perspective is given below:
	Transfer Price >=variable Cost per unit +[Total Contribution margin on lost sales]+number of units transferred
	Transfer Price >=$26 +($43-$30)*31000/62000
	=	$26 +$6.5
	=	$32.50