# B refuses this price what will be the loss in

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b. refuses this price. What will be the loss in potential profits for the company as a whole? 70,000 X \$3 = \$210,000 Loss in potential profits Proof: Division A: TP per unit to Division B \$38 Variable cost per unit associated with transfer 15 Benefit per unit to Division A \$23 Less CM given up to make transfer possible 21 Net per unit benefit to Division A \$2 Number of units transferred 70,000 Total increase in CM to Division A as a result of transfer \$140,000 Division B: Cost per unit if purchased outside \$39 Cost per unit if transferred at agreed upon TP 38 Benefit per unit to Division B \$1 Number of units transferred 70,000 Total increase in CM to Division A as a result of transfer \$70,000 Total benefit to the company resulting from the transfer \$210,000 Note: Transfer price allocates profit between Division A and Division B. 3. supplier. a. Will the managers agree to a transfer? If so, within what range will the transfer price be? 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 (excess capacity) \$0 Excess Capacity Contribution margin generated if a transfer takes place at \$35/unit 0 \$35 - \$35 Division A manager is indifferent to selling outside or transferring to Division B \$0 Division B: Cost per unit if purchased outside \$57 Cost per unit if transferred at \$35/unit 35 Division B manager would accept an internal transfer because of a \$22 per unit decrease in cost \$22 \$440,000 The managers should agree to a transfer. Division A will be willing to accept a price of \$35 or higher Division B will be willing to pay no more \$57, the outside price. The range of negotiation within which a transfer should take place is \$35 to \$57. 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 \$57, while Division B's manager will try to hold out for a transfer price of \$35 per unit transferred. b. accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why? Benefit to company as a whole resulting from transfers 20,000 X \$22 = \$440,000 Division A: TP per unit to Division B \$52 Variable cost per unit associated with transfer 35 Benefit per unit to Division A \$17 Less CM given up to make transfer possible (excess capacity) 0 Net per unit benefit to Division A \$17 Number of units transferred 20,000 Total increase in CM to Division A as a result of transfer \$340,000 Effect on ROI: Divisional income will increase by \$340,000 with no change in investment (excess capacity). Thus, Division A's ROI will increase. Division B: Cost per unit if purchased outside \$57 Cost per unit if transferred at agreed upon TP 52 Benefit per unit to Division B \$5 Number of units transferred 20,000 Total increase in CM to Division A as a result of transfer \$100,000 Total benefit to the company resulting from the transfer \$440,000 Note: Transfer price allocates profit between Division A and Division B.
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