21 - 22-27 (Cont'd.) variable or incremental costs. In any...

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Unformatted text preview: 22-27 (Cont'd.) variable or incremental costs. In any event, when there is heavy interdependence between divisions, such as in this case, some system of subsidies may be needed to deal with the three problems of goal congruence, management effort, and subunit autonomy. Of course, where heavy subsidies are needed, a question can be raised as to whether the existing degree of decentralization is optimal. 22-28 (3040 min.) Pricing in imperfect markets (continuation of 22-27). An alternative presentation, which contains the same numerical answers, can be found at the end of this solution. 1. Potential contribution from external intermediate sale is 1,000 ($195 $120) Contribution through keeping price at $200 is 800 $80. Forgone contribution by transferring 200 units $75,000 64,000 $11,000 Opportunity cost per unit to the supplying division by transferring internally: = $55 Transfer price = $120 + $55 = $175 An alternative approach to obtaining the same answer is to recognize that the incremental or outlay cost is the same for all 1,000 units in question. Therefore, the total revenue desired by A would be the same for selling outside or inside. Let X equal the transfer price at which Division A is indifferent between selling all units outside versus transferring 200 units inside. 1,000 $195 = (800 $200) + 200X X = $175 The $175 price will lead to the correct decision. Division B will not buy from Division A because its total costs of $175 + $150 will exceed its prospective selling price of $300. Division A will then sell 1,000 units at $195 to the outside; Division A and the company will have a contribution margin of $75,000. Otherwise, if 800 units were sold at $200 and 200 units were transferred to Division B, the company would have a contribution of $64,000 plus $6,000 (200 units of final product $30), or $70,000. A comparison might be drawn regarding the computation of the appropriate transfer prices between the preceding problem and this problem: ...
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21 - 22-27 (Cont'd.) variable or incremental costs. In any...

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