Question

A corporation has a segment, Division A that sells a part on the outside market for $120. Its costs, based on a unit capacity of 200,000 units, are $25 variable and $45 fixed. The company has a related segment, Division B that could use the part in its own assembly operations. Division B buys the part from another supplier for $112, and it will need 40,000 units. Required: 1) Assume division A is selling 140,000 units to outside customers. From the standpoint of Division A, what is the lowest acceptable transfer price for units sold to Division B? From the standpoint of Division B, what is the highest acceptable transfer price for units purchased from Division A. If left to bargain freely, would you expect the division managers to voluntarily agree on a transfer of units from Division A to Division B? Give reasons. From the standpoint of the entire company, should the transfer take place? Give reasons. 2) Now assume Division A is selling all its capacity to outside customers. Answer a through d under this new condition.

Answer 1

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Ans: Amount_in$ * Required -1: Division - A Selling 140000 Units to ownside Customers: & Part-a: $25 should be the lowest price from the Stand point of Division - A (ie. Only yeriable cost): pant-b : $112 should be the highest price from the stand point of Division -B (ine. the purchase price of). - part-c ilf left to bangain fireery - the following points will reais for consideration for yoluntarily agreeing i * The manager of Division - A should transfere - 40000 units to Division -B, at any poice between $25 to $120. of The manager of Dirision-B should the transfere from Division - A alt rower than $112 . accept the any price te part-di from the stand point of entire company, the transfere should be taken place.

because the company will save every dollart where the transfer price fixes between $25 - and $ 112. * Required-2: Division -A, Selling 200000 units to outside customers! ppart-a : $120 should be the lowest price from the standpoint of Division - A (DIV-A, has the oppertunity to sold the same to outside customer at $120). * parut-b: $112 should be the highest price from the Stand point of Division - B. De pant-c ilf left for bargain freely, the bargain will not successful due to the following reasons : offer below the # Division - A will not accept any transfer price of $120 - any offer above the # Division B . fransfer will not accept price of $112.

* part-d from the stand point of entine compony, the transfer should not be taken place. Because : tlf division. -A transfers below than $120, it will sacrificing the differential price, which they have by selling to outside customer & lf division -B accept higher than $112, it will sacrificing the differential price, which -- they have by purchasing from open market,
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