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

	Case
	A	B
Division X:
Capacity in units	200,000	200,000
Number of units being sold to outside customers	200,000	160,000
Selling price per unit to outside customers	$90	$75
Variable costs per unit	$70	$60
Fixed costs per unit (based in capacity)	$13	$8
Division Y:
Number of units needed for production	40,000	40,000
Purchase price per unit now being paid to an outsider supplier	$86	$74

Required:

a. Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division.

Variable cost per unit	70
Less: Avoidable cost		70
Total contribution margin on lost sales
No. of units transferred		0
Transfer price ≥		70

a. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. Determine the transfer price of the selling division.

Variable cost per unit		60
Total contribution margin on lost sales
No. of units transferred		0
Transfer price ≥		0

b. If the managers are free to negotiate and make decisions ontheir own, will a transfer take place?

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______.

Answer rating: 100% (QA)

Transfer price Transfer price is the price that one division of an organization will pay to another division of the organization for the transfer of m... View the full answer