# Cases 1 2 3 4 division a capacity in units 50000

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Cases 1 2 3 4 Division A: Capacity in Units 50,000 300,000 100,000 200,000 Number of units now being sold to outside customers 50,000 300,000 75,000 200,000 Excess Capacity or Full Capacity Full Full Excess Full Selling price per unit to outside customers \$100 \$40 \$60 \$45 Variable cost per unit 63 19 35 30 Contribution per unit \$37 \$21 \$25 \$15 Fixed costs per unit (based on capacity) \$25 \$8 \$17 \$6 Division B: Number of units needed annually 10,000 70,000 20,000 60,000 Purchase price now being paid to an outside supplier \$92 \$39 \$60 - Discounted purchase price being paid to an outside supplier \$57 Before any purchase discount. Required: 1. any sales to Division B. Will the managers agree to a transfer and if so, within what range will the transfer price be? Explain. Transfer Price to maximize company profits: TP = Out of pocket costs / unit + (Total contribution margin given up on lost sales) / units transferred Division A: Contribution margin per unit generated under the current situation \$37 \$100 - 63 Contribution margin per unit generated if a transfer takes place at \$95/unit 37 \$95 - (\$63 - \$5) Division A manager is indifferent to selling outside or transferring to Division B \$0 Division B: Cost per unit if purchased outside \$92 Cost per unit if transferred at \$95/unit 95 Division B manager would reject internal transfer because of \$3 per unit increase in cost (\$3) The managers will not agree to a transfer. Division A will not accept less than \$95 and Division B will not pay more than \$92, the outside price. There is no possible range of negotiation within which a transfer could take place. 2. Division B. a. Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain. Transfer Price to maximize company profits: TP = Out of pocket costs / unit + (Total contribution margin given up on lost sales) / units transferred Division A: Contribution margin per unit generated under the current situation \$21 \$40 - \$19 Contribution margin per unit generated if a transfer takes place at \$36/unit 21 \$36 - (\$19 - \$4) Division A manager is indifferent to selling outside or transferring to Division B \$0 Division B: Cost per unit if purchased outside \$39 Cost per unit if transferred at \$36/unit 36 Division B manager would accept an internal transfer because of a \$3 decrease in cost \$3 The managers should agree to a transfer. Division A will be willing to accept a price of \$36 or higher Division B will be willing to pay no more \$39, the outside price. The range of negotiation within which a transfer should take place is \$39 to \$36. Even though the company would be better off with any transfer price within this range, each manager will negotiate for the transfer price that benefits their division the most. Division A's manager will try to hold out for a transfer price of \$39, while Division B's manager will try to hold out for a transfer price of \$36 per unit transferred.
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