A9 - Problem1224 1....

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Problem 12-24   1. From the standpoint of the selling division, Alpha Division: Total contribution margin on lost sales Variable cost Transfer price  +  per unit Number of units transferred ³ ( ) ($30 - $18) × 5,000 Transfer price $18 - $2 +  = $16 + $12 = $28 5,000 ³ But, from the standpoint of the buying division, Beta Division:  £ Transfer price Cost of buying from outside supplier = $27 Beta Division won’t pay more than $27 and Alpha Division will  not accept less than $28, so no deal is possible. There will be  no transfer. 2. a. From the standpoint of the selling division, Alpha Division: Total contribution margin on lost sales Variable cost Transfer price  +  per unit Number of units transferred ³ ( ) ($90 - $65) × 30,000 Transfer price $65 - $5 + = $60 + $25 = $85 30,000 ³ From the standpoint of the buying division, Beta Division:  £ Transfer price Cost of buying from outside supplier = $89 In this instance, an agreement is possible within the range:
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£ £ $85 Transfer price $89 Even though both managers would be better off with  any  transfer price within this range, they may disagree about the  exact amount of the transfer price. It would not be surprising to  hear the buying division arguing strenuously for $85 while the  selling division argues just as strongly for $89.
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Problem 12-24  (continued) b. The loss in potential profits to the company as a whole will  be: Beta Division’s outside purchase price. ........................ $89 Alpha Division’s variable cost on the internal transfer. ..   85     Potential added contribution margin lost to the  company as a whole. .................................................. $ 4 Number of units. ............................................................ × 30,000 Potential added contribution margin and company  profits forgone. ........................................................... $120,000 Another way to derive the same answer is to look at the loss  in potential profits for each division and then total the losses  for the impact on the company as a whole. The loss in  potential profits in Alpha Division will be: Suggested selling price per unit. ................................... $88 Alpha Division’s variable cost on the internal transfer. ..   85     Potential added contribution margin per unit. ................ $ 3 Number of units. ............................................................ × 30,000 Potential added contribution margin and divisional  profits forgone. ...........................................................
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This note was uploaded on 01/16/2010 for the course AF AF 3112 taught by Professor Woo-jonglee during the Spring '08 term at Polytechnic University of Puerto Rico.

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A9 - Problem1224 1....

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