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Exercise $11-13($Algo$)$ Transfer Pricing Situations $[$LO$11-3]$

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In each of the cases below, assume 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.

Case

A B

Division X:

Capacity in units $97,000110,000$

Number of units being sold to outside customers $97,00086,000$

Selling price per unit to outside customers $ $54$ $ $26$

Variable costs per unit $ $20$ $ $15$

Fixed costs per unit $($based on capacity$)$ $ $7$ $ $5$

Division Y:

Number of units needed for production $24,00024,000$

Purchase price per unit now being paid to an outside supplier $ $47$ $ $30$

Exercise $11-13($Algo$)$ Part $1$

Required:

$1.$ Refer to the data in case A above. Assume in this case that $$2$ per unit in variable selling costs can be avoided on intracompany sales.

a$.$ What is the lowest acceptable transfer price from the perspective of the selling division?

b$.$ What is the highest acceptable transfer price from the perspective of the buying division?

c$.$ What is the range of acceptable transfer prices $($if any$)$ between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?Exercise $11-13($Algo$)$ Part $2$

Required:

$2.$ Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales.

a$.$ What is the lowest acceptable transfer price from the perspective of the selling division?

b$.$ What is the highest acceptable transfer price from the perspective of the buying division?

c$.$ What is the range of acceptable transfer prices $($if any$)$ between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?