In each of the cases below, 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. The managers of the divisions are evaluated based on their divisional profits.

Required:

1.         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. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

2.         Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

Transcribed Image Text:

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 S8 Fixed costs per unit (based on capacity) S13 Division Y: Number of units needed for production 40,000 40,000 Purchase price per unit now being paid to an $86 outside supplier $74