4 Problem 11A-6 Basic Transfer Pricing [LO11-5] 10 points Alpha and Beta are div

Question

4 Problem 11A-6 Basic Transfer Pricing [LO11-5] 10 points Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division's return on investment (ROI). Assume the following information relative to the two divisions: Case Alpha Division Capacity in units Number of units now being sold to 52,e88 384,e0e 189,888 193,88e 83,0 193,ee 66 S 45 outside custoners Selling price per unit to outside 52,000 384,80e eBook customers Variable costs per unit Fixed costs per unit (based on 104% 68 $ 44 24 $ 41 S 28 capacity) $27$14 S 24 $ Beta Division: Number of units needed annually Purchase price now being paid to 1e,680 68, 8ee 21,0 58,8ee References an outside supplier 96 42 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 $5 per unit in commissions on any sales to Beta Division. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective 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 a transfer? 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. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? 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 68,000 units to Beta Division for $41 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 5% price discount from the outside supplier. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective 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 a transfer? d. Assume Beta Division offers to purchase 21,000 units from Alpha Division at $57.70 per unit. If Alpha Division accepts this price, would you expect its ROl to increase, decrease, or remain unchanged? 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 58,000 units of a different product from the one Alpha Division is producing now. The new product would require $24 per unit in variable costs and would require that Alpha Division cut back production of its present product by 29,000 units annually. What is the lowest acceptable transfer price from Alpha Division's perspective? Complete this question by entering your answers in the tabs below.

Explanation / Answer

1

a. Since there is no spare capacity, lowest accetable transfer price to Alpha would be sales price ( excluding commission) = 104 - 5 = $99

b. Highest acceptable transfer price to beta would be the price it pays to outside market = $96

c. No range of acceptable transfer price. No managers will not agree to transfer.

2.

a. Since there is no spare capacity, lowest accetable transfer price to Alpha would be sales price ( excluding shipping cost ) = 44 - 5 = 39

b. Highest acceptable transfer price to beta would be the price it pays to outside market = $ 42

c. accptable range of transfer price between two divsion is $ 39 - 42. There should not be any disagreement over the the tranfer price between two divsion. However in order to earn more profit there can disagreement over the price to be selected with in the price range .

d.

Alpha Beta

incrrease in company profit = A+B = 136000 +68000 =$ 204000

3.

a. Due to spare capacity in alpha division, maximum transfer price is variable cost i.e $ 41

B. Maximum transfer price from the perspective of beta division would be $ 66 X .95 = 62.7 i.e the price payable to outside market.

c. price range $ 41 - 62.7yes managers will agree to a transfer price.

d. Alpha divsion ROI will increase .

4. Since there is no spare capacity in alpha division. trasnfer price would be Variable cost + contribution to be lost

i.e 24 + (45-28)= $ 41.

Profit of alpha division when all units are transferred to outside market 6080000 Cost when 68000 units are purchase by beta from outside market 2856000 Profit of alpha division when 68000 units are transferred to beta division and rest are transferred to outside market 6216000 Cost when 68000 units are purchase by beta from Alpha division 2788000 Increase in profit when 68000 units are transferred to beta division and rest are transferred to outside market(A) 136000 Decrease in cost when purchase from alpha division (B) 68000

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