Please see attached file.
In each of the cases below, assume that 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 manager of the divisions are evaluated based on their divisional profits.
Capacity in units 100,000 100,000
Number of units being sold to outside customers 100,000 80,000
Selling price per unit to outside customers $50 $35
Variable costs per unit $30 $20
Fixed costs per unit (based on capacity) $8 $6
Number of units needed for production 20,000 20,000
Purchase price per unit now being paid to an outside supplier $47 $34
Refer to the data in case A above. Assume that $2 per unit in variable selling costs can be avoided on intracompany sales. If the manager are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.
Refer to the data used in case B above. In this case, there will be no reduction in variable selling costs on intracompny sales. If the manager are free to negotiate and make decisions on theier own, will a transfer take place? If so, within what range will the transfer price fall? Explain.
Excel file shows calculations of transfer prices under different situations.