Question

In each of the cases below, assume that Division X has a productthat can be sold either to outside customers or to Division Y ofthe same company for use in its production process. The managers ofthe divisions are evaluated based on their divisional profits.

Case

A

B

Division X:

Capacity in units

103,000

94,000

Number of units being sold tooutside customers

103,000

78,000

Selling price per unit tooutside customers

$

53

$

33

Variable costs per unit

$

26

$

14

Fixed costs per unit (based oncapacity)

$

8

$

4

Division Y:

Number of units needed forproduction

16,000

16,000

Purchase price per unit nowbeing paid to an outside supplier

$

47

$

28

In each of the cases below, assume that Division X has a productthat can be sold either to outside customers or to Division Y ofthe same company for use in its production process. The managers ofthe divisions are evaluated based on their divisional profits.

	Case
		A				B
Division X:
Capacity in units		103,000				94,000
Number of units being sold tooutside customers		103,000				78,000
Selling price per unit tooutside customers	$	53			$	33
Variable costs per unit	$	26			$	14
Fixed costs per unit (based oncapacity)	$	8			$	4
Division Y:
Number of units needed forproduction		16,000				16,000
Purchase price per unit nowbeing paid to an outside supplier	$	47			$	28
Required: 1-a. Refer to the data in case A above. Assume in this case that$3 per unit in variable selling costs can be avoided onintracompany sales. Variable Cost per unit: Less avoidabe cost: Total Contribution Margin on lost sales: No. of units transferred: Transfer price: 2-a. Refer to the data in case B above. In this case, there willbe no savings in variable selling costs on intracompany sales.Determine the transfer price of the selling division. 2-b. If the managers are free to negotiate and make decisions ontheir own, will a transfer take place? 2-c. What is the range of transfer price the managers of bothdivisions should agree? The lowest transfer price would be ______and the highest transfer price would be______.