Problem $11-25($Algo$)$ Basic Transfer Pricing $[$LO$11-3]$

Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their return on investment $($ROI$).$ Assume the following information for the two divisions:

$*$Before any purchase discount.

Required:

$1.$ Refer to case $1$ shown above. Alpha Division can avoid $\backslash (\backslash$$ $2\backslash )$ per unit in commissions on any sales to Beta Division.

a$.$ What is Alpha Division's lowest acceptable transfer price?

b$.$ What is Beta Division's highest acceptable transfer price?

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

$2.$ Refer to case $2$ shown above. A study indicates Alpha Division can avoid $\backslash$$$5$ per unit in shipping costs on any sales to Beta Division.

a$.$ What is Alpha Division's lowest acceptable transfer price?

b$.$ What is Beta Division's highest acceptable transfer price?

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 $40,000$ units to Beta Division for $\backslash (\backslash$$ $108\backslash )$ per unit and Beta Division refuses this price. What will be the company's loss in potential profits?

$3.$ Refer to case $3$ shown above. Assume Beta Division is now receiving an $\backslash (8\backslash \%\backslash )$ price discount from the outside supplier.

a$.$ What is Alpha Division's lowest acceptable transfer price?

b$.$ What is Beta Division's highest acceptable transfer price?

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

d$.$ Assume Beta Division offers to purchase $30,000$ units from Alpha Division at $\backslash (\backslash$$ $110\backslash )$ 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 Beta Division wants Alpha Division to provide it with $122,000$ units of a different product from the one Alpha Division is producing now. The new product would require $\backslash (\backslash$$ $41\backslash )$ per unit in variable costs and would require Alpha Division to cut back production of its present product by $45,750$ units annually. What is Alpha Division's lowest acceptable transfer price?