Alpha and Beta are divisions within the same company. Themanagers of both divisions are evaluated based on their owndivision’s return on investment (ROI). Assume the followinginformation relative to the two divisions:
| Case |
| 1 | 2 | 3 | 4 |
| Alpha Division: | | | | | | | | | |
| Capacity in units | | 56,000 | | 318,000 | | 102,000 | | | 208,000 |
Number of units now being sold to
outside customers | | 56,000 | | 318,000 | | 79,000 | | | 208,000 |
Selling price per unit to outside
customers | $ | 96 | $ | 41 | $ | 64 | | $ | 46 |
| Variable costs per unit | $ | 59 | $ | 20 | $ | 40 | | $ | 32 |
Fixed costs per unit (based on
capacity) | $ | 23 | $ | 10 | $ | 21 | | $ | 8 |
| Beta Division: | | | | | | | | | |
| Number of units needed annually | | 10,000 | | 68,000 | | 18,000 | | | 56,000 |
Purchase price now being paid to
an outside supplier | $ | 87 | $ | 40 | $ | 64 | * | | — |
|
*Before any purchase discount.
Managers are free to decide if they will participate in anyinternal transfers. All transfer prices are negotiated.
Required:
1. Refer to case 1 shown above. Alpha Division can avoid $6 perunit in commissions on any sales to Beta Division.
a. What is the lowest acceptable transfer price from theperspective of the Alpha Division?
b. What is the highest acceptable transfer price from theperspective of the Beta Division?
c. What is the range of acceptable transfer prices (if any)between the two divisions? Will the managers probably agree to atransfer?
2. Refer to case 2 shown above. A study indicates that AlphaDivision can avoid $5 per unit in shipping costs on any sales toBeta Division.
a. What is the lowest acceptable transfer price from theperspective of the Alpha Division?
b. What is the highest acceptable transfer price from theperspective of the Beta Division?
c. What is the range of acceptable transfer prices (if any)between the two divisions? Would you expect any disagreementbetween the two divisional managers over what the exact transferprice should be?
d. Assume Alpha Division offers to sell 68,000 units to BetaDivision for $39 per unit and that Beta Division refuses thisprice. What will be the loss in potential profits for the companyas a whole?
3. Refer to case 3 shown above. Assume that Beta Division is nowreceiving an 6% price discount from the outside supplier.
a. What is the lowest acceptable transfer price from theperspective of the Alpha Division?
b. What is the highest acceptable transfer price from theperspective of the Beta Division?
c. What is the range of acceptable transfer prices (if any)between the two divisions? Will the managers probably agree to atransfer?
d. Assume Beta Division offers to purchase 18,000 units fromAlpha Division at $55.16 per unit. If Alpha Division accepts thisprice, would you expect its ROI to increase, decrease, or remainunchanged?
4. Refer to case 4 shown above. Assume that Beta Division wantsAlpha Division to provide it with 56,000 units of a differentproduct from the one Alpha Division is producing now. The newproduct would require $27 per unit in variable costs and wouldrequire that Alpha Division cut back production of its presentproduct by 28,000 units annually. What is the lowest acceptabletransfer price from Alpha Division’s perspective?
