Problem 11A-6 Basic Transfer Pricing [LO11-5]

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

	Case
	1	2	3	4
Alpha Division:
Capacity in units	54,000	307,000	110,000	206,000
Number of units now being sold to outside customers	54,000	307,000	87,000	206,000
Selling price per unit to outside customers	$97	$39	$64	$43
Variable costs per unit	$60	$19	$39	$27
Fixed costs per unit (based on capacity)	$22	$5	$22	$4
Beta Division:
Number of units needed annually	9,100	72,000	18,000	60,000
Purchase price now being paid to an outside supplier	$91	$37	$64*

* Before any purchase discount.

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

Required:
1.	Refer to case 1 shown above. Alpha Division can avoid $3 per unit in commissions on any sales to Beta Division.

a.	What is the minimum transfer price for Alpha Division

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

b.	What is the maximum transfer price for Beta Division?

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.

a-1.	What is the minimum transfer price for Alpha Division?

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

a-2.

What is the maximum transfer price for Beta Division?

Maximum transfer price

Assume that Alpha Division offers to sell 72,000 units to Beta Division for $36 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole?

Loss in potential profits for the company:

3.	Refer to case 3 shown above. Assume that Beta Division is now receiving an 5% price discount from the outside supplier.

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

a-1.	What is the minimum transfer price for Alpha Division?

a-2.	What is the range of transfer price the manager's of both divisions should agree? (Round your answers to 2 decimal places.)

The lowest transfer price would be

and the highest transfer price would be

a-3.

Will the managers agree to a transfer?

	Yes
	No

b.	Assume that Beta Division offers to purchase 18,000 units from Alpha Division at $55.80 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged?

Division As ROI should

4.

Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 60,000 units of a different product from the one that Alpha Division is now producing. The new product would require $23 per unit in variable costs and would require that Alpha Division cut back production of its present product by 30,000 units annually. What is the lowest acceptable transfer price from Alpha Divisions perspective?

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