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Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own divisions return on investment (ROI). Assume the following information relative to the two divisions:

	Case
	1		2		3			4
Alpha Division:
Capacity in units		56,000		294,000		101,000			202,000
Number of units now being sold to outside customers		56,000		294,000		78,000			202,000
Selling price per unit to outside customers	$	101	$	40	$	60		$	44
Variable costs per unit	$	63	$	17	$	36		$	27
Fixed costs per unit (based on capacity)	$	24	$	8	$	18		$	4
Beta Division:
Number of units needed annually		9,000		68,000		17,000			64,000
Purchase price now being paid to an outside supplier	$	94	$	40	$	60	*

*Before any purchase discount.

Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated.

Required:

3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 5% price discount from the outside supplier.

a. What is the lowest acceptable transfer price from the perspective of the Alpha Division?

b. What is the highest acceptable transfer price from the perspective of the Beta Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer?

d. Assume Beta Division offers to purchase 17,000 units from Alpha Division at $52.00 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged?

4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 64,000 units of a different product from the one Alpha Division is producing now. The new product would require $23 per unit in variable costs and would require that Alpha Division cut back production of its present product by 32,000 units annually. What is the lowest acceptable transfer price from Alpha Divisions perspective?

Identify the lowest and highest acceptable transfer prices: Lowest acceptable transfer price Highest acceptable transfer price Identify the range of acceptable transfer prices (if any): OThere is not a range of acceptable transfer prices OThere is a range of acceptable transfer prices as shown below Transfer price Will the managers agree to the trade? Yes No Division A's ROI should Increase ODecrease K Req 2A to 2D Req 4

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