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
2
3
4
Alpha Division:
Capacity in units
99,000
419,000
169,000
319,000
Number of units now being sold to outside
customers
99,000
419,000
119,000
319,000
Selling price per unit to outside
customers
$ 68
$ 128
$ 170
$ 88
Variable costs per unit
$ 56
$ 103
$ 135
$ 64
Fixed costs per unit (based on capacity)
$6
$ 15
$ 20
$9
Beta Division:
Number of units needed annually
24,000
49,000
39,000
123,800
Purchase price now being paid to an
outside supplier
$ 65
$ 127
$ 170
*Before any purchase discount
Required:
1. Refer to case 1 shown above. Alpha Division can avoid $2 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 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 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 49,000 units to Beta Division for $126 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 8% 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 probably agree to a
transfer?
d. Assume Beta Division offers to purchase 39,000 units from Alpha Division at $155 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 that Beta Division wants Alpha Division to provide it with 123,800 units of a different product
from the one Alpha Division is producing now. The new product would require $59 per unit in variable costs and would require that
Alpha Division cut back production of its present product by 46,425 units annually. What is Alpha Division's lowest acceptable
transfer price?
4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 123,800 units of a different
product from the one Alpha Division is producing now. The new product would require $59 per unit in variable costs and would
require that Alpha Division cut back production of its present product by 46,425 units annually. What is Alpha Division's lowest
acceptable transfer price?
