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 that $2 per unit in variable selling costs can be avoided on intra-company 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 reduction in variable selling costs on intra-company 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.

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Case Division X: Capacity in units . Number of units being sold to outside customers ......100,000 80,000 Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity).. 100,000 100,000 Πι. $50 $30 $8 $35 $20 $6 Division Y: Number of units needed for production Purchase price per unit now being paid to an 20,000 20,000 outside supplier $47 $34