64. Award: 10.00 points Problems? Adjust credit for all students.

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
1 2 3 4
Alpha Division:
Capacity in units 80,000 400,000 150,000 300,000
Number of units now being sold to
outside customers 80,000 400,000 100,000 300,000
Selling price per unit to outside
customers $ 30 $ 90 $ 75 $ 50
Variable costs per unit $ 18 $ 65 $ 40 $ 26
Fixed costs per unit (based on
capacity) $ 6 $ 15 $ 20 $ 9
Beta Division:
Number of units needed annually 5,000 30,000 20,000 120,000
Purchase price now being paid to
an outside supplier $ 27 $ 89 $ 75* —

*Before any purchase discount.

Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated.

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Required:

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1. Refer to case 1 shown above. Alpha Division can avoid $2 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?

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b. What is the highest acceptable transfer price from the perspective of the Beta Division?

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c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

o.
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
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Division.
a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?
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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 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will
be the loss in potential profits for the company as a whole?
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3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 8% price discount from the outside supplier.
aC s

a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?
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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 $60 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 120,000 units of a different product
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from the one Alpha Division is producing now. The new product would require $21 per unit in variable costs and would require that
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Alpha Division cut back production of its present product by 45,000 units annually. What is the lowest acceptable transfer price from
Alpha Division’s perspective?

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Th

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 Complete this question by entering your answers in the tabs below.

Req 1A to 1C Req 2A to 2D Req 3A to 3D Req 4

1. Refer to case 1 shown above. Alpha Division can avoid $2 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?
Show less 

Identify the lowest and highest acceptable transfer prices:

Lowest acceptable transfer price $ 28
Highest acceptable transfer price $ 27

Identify the range of acceptable transfer prices (if any):

There is not a range of acceptable transfer prices.
There is a range of acceptable transfer prices as shown below:
≤ Transfer price ≤

Will the managers agree to the trade?

Yes

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e r as
No

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 Req 1A to 1C Req 2A to 2D 

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o.
rs e
ou urc
 
Explanation:
o
aC s

1a, 1b & 1c:

From the standpoint of the selling division, Alpha Division:
v i y re

Total contribution margin on lost sales
Transfer price ≥ Variable cost per unit +
Number of units transferred

($30 − $18) × 5,000
Transfer price ≥ ($18 − $2) + = $16 + $12 = $28
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5,000

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But, from the standpoint of the buying division, Beta Division:

Transfer price ≤ Cost of buying from outside supplier = $27
There is no range of acceptable transfer prices. Beta Division won’t pay more than $27 and Alpha Division will not accept less than $28,
so no deal is possible. There will be no transfer.

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2a, 2b & 2c.

From the standpoint of the selling division, Alpha Division:
Total contribution margin on lost sales
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Transfer price ≥ Variable cost per unit +

Number of units transferred

($90 − $65) × 30,000
Transfer price ≥ ($65 − $5) + = $60 + $25 = $85
30,000

From the standpoint of the buying division, Beta Division:
Transfer price ≤ Cost of buying from outside supplier = $89
In this instance, the range of acceptable transfer prices is:
$85 ≤ Transfer price ≤ $89
Even though both managers would be better off with any transfer price within this range, they may disagree about the exact amount of
the transfer price. It would not be surprising to hear the buying division arguing strenuously for $85 while the selling division argues just
as strongly for $89.

2d.
The loss in potential profits to the company as a whole will be:


Beta Division’s outside purchase price $ 89
Alpha Division’s variable cost on the internal transfer 85
Potential added contribution margin lost to the
$ 4
company as a whole
Number of units ×30,000
Potential added contribution margin and company
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$ 120,000
profits forgone

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Another way to derive the same answer is to look at the loss in potential profits for each division and then total the losses for the impact
on the company as a whole. The loss in potential profits in Alpha Division will be:


Suggested selling price per unit $ 88
Alpha Division’s variable cost on the internal transfer 85
Potential added contribution margin per unit $ 3
Number of units ×30,000
Potential added contribution margin and divisional $ 90,000
profits forgone

The loss in potential profits in Beta Division will be:


Outside purchase price per unit $ 89
Suggested price per unit inside 88
Potential cost avoided per unit $ 1
Number of units ×30,000
Potential added contribution margin and divisional $ 30,000
profits forgone

The total of these two amounts equals the $120,000 loss in potential profits for the company as a whole.

3.
a.
From the standpoint of the selling division, Alpha Division:

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Total contribution margin on lost sales
Transfer price ≥ Variable cost per unit +

e r as
Number of units transferred

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$0
Transfer price ≥ $40 + = $40

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20,000

3b & 3c.

o.
From the standpoint of the buying division, Beta Division:
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Transfer price ≤ Cost of buying from outside supplier
Transfer price ≤ $75 − (0.08 × $75) = $69
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In this case, the range of acceptable transfer prices is:
$40 ≤ Transfer price ≤ $69
If the managers understand what they are doing and are reasonably cooperative, they should be able to come to an agreement with a
transfer price within this range.
o

3d.
aC s

Alpha Division’s ROI should increase. The division has idle capacity, so selling 20,000 units a year to Beta Division should cause no
increase in the division’s operating assets. Therefore, Alpha Division’s turnover should increase. The division’s margin should also
v i y re

increase, because its contribution margin will increase by $400,000 as a result of the new sales, with no offsetting increase in fixed
costs:


Selling price $ 60
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Variable costs 40
Contribution margin $ 20
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Number of units ×20,000

Added contribution margin $ 400,000

Thus, with both the margin and the turnover increasing, the division’s ROI would also increase.
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4.
Th

From the standpoint of the selling division, Alpha Division:

Total contribution margin on lost sales
Transfer price ≥ Variable cost per unit +
Number of units transferred

($50 − $26) × 45,000
Transfer price ≥ $21 + = $21 + $9 = $30
120,000

References

Worksheet Difficulty: 2 Medium Learning Objective: 11-05 (Appendix 11A) Determine the
range, if any, within which a negotiated transfer price
should fall.

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 64. Award: 10.00 points Problems? Adjust credit for all students.

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
1 2 3 4
Alpha Division:
Capacity in units 80,000 400,000 150,000 300,000
Number of units now being sold to
outside customers 80,000 400,000 100,000 300,000
Selling price per unit to outside
customers $ 30 $ 90 $ 75 $ 50
Variable costs per unit $ 18 $ 65 $ 40 $ 26
Fixed costs per unit (based on
capacity) $ 6 $ 15 $ 20 $ 9
Beta Division:
Number of units needed annually 5,000 30,000 20,000 120,000
Purchase price now being paid to
an outside supplier $ 27 $ 89 $ 75* —

*Before any purchase discount.

Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated.

m
Required:

e r as
1. Refer to case 1 shown above. Alpha Division can avoid $2 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?

co
b. What is the highest acceptable transfer price from the perspective of the Beta Division?

eH w
c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

o.
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.
rs e
a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?
ou urc
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 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will
be the loss in potential profits for the company as a whole?
o

3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 8% price discount from the outside supplier.
aC s

a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?
v i y re

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 $60 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 120,000 units of a different product
ed d

from the one Alpha Division is producing now. The new product would require $21 per unit in variable costs and would require that Alpha
Division cut back production of its present product by 45,000 units annually. What is the lowest acceptable transfer price from Alpha
ar stu

Division’s perspective?

sh is
Th

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https://www.coursehero.com/file/44135857/Managerial-ACCT-Quiz-259pdf/
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