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Problem 11A-6 (60 minutes)
1. From the standpoint of the selling division, Alpha Division:
Total contribution margin on lost sales
Variable cost
2. a. From the standpoint of the selling division, Alpha Division:
Total contribution margin on lost sales
Variable cost
Transfer price +
per unit Number of units transferred
³
( )
($90 - $65) × 30,000
Transfer price $65 - $5 + = $60 + $25 = $85
30,000
³
From the standpoint of the buying division, Beta Division:
£Transfer price Cost of buying from outside supplier = $89
In this instance, an agreement is possible within the range:
££$85 Transfer price $89
Even though both managers would be better off with
any
transfer price
within this range, they may disagree about the exact amount of the
transfer price. It would not be surprising to hear the buying division
arguing strenuously for $85 while the selling division argues just as
strongly for $89.
