solution

Alpha International Corporation has two divisions, beta and gamma. Beta produces an electronic component that sells for $75 per unit, with the following costs based on its capacity of 200,000 units:

Determine minimum transfer price.

Beta is operating at 75% of normal capacity and gamma is purchasing 15,000 units of the same component from an outside supplier for $70 per unit.

Instructions

a. Calculate the benefit, if any, to beta in selling to gamma 15,000 units at the outside supplier’s price.

b. Calculate the lowest price beta would be willing to accept.

c. If beta is operating at full capacity, what would be the lowest transfer price that beta division is willing to accept?

d. Assume that a transfer price of $75 is used between beta and gamma. Calculate the effect on the profits of beta, gamma, and Alpha International Corporation.

e. Explain why the level of capacity in the beta division affects the transfer price.