Total contribution margin on lost sales
Variable cost
Transfer price +
per unit Number of units transferred
³
Problem 12A-6 (60 minutes)
1. 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
( )
³($30 – $18) × 5,000
Transfer price $18 – $2 + = $16 + $12 = $28
5,000
62 Managerial Accounting for Managers, 4th Edition
Problem 12A-6 (continued)
Beta Division’s outside purchase price …………………….
$89
Alpha Division’s variable cost on the internal transfer …
85
Potential added contribution margin lost to the
company as a whole ………………………………………..
$ 4
Number of units ………………………………………………..
× 30,000
Potential added contribution margin and company
profits forgone ………………………………………………..
$120,000
Alpha Division will be:
Suggested selling price per unit …………………………….
$88
Alpha Division’s variable cost on the internal transfer …
85
Potential added contribution margin per unit ……………
$ 3
Number of units ………………………………………………..
× 30,000
Potential added contribution margin and divisional
profits forgone ………………………………………………..
$90,000
Outside purchase price per unit …………………………….
$89
Suggested price per unit inside …………………………….
88
Potential cost avoided per unit …………………………..…
$ 1
Number of units ………………………………………………..
× 30,000
Potential added contribution margin and divisional
profits forgone ………………………………………………..
$30,000
3. 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
$0
Transfer price $40 + = $40
20,000
³
Solutions Manual, Appendix 12A 63
Problem 12A–6 (continued)
From the standpoint of the buying division, Beta Division:
In this case, an agreement is possible within the range:
££$40 Transfer price $69
transfer price within this range.
b. Alpha Division’s ROI should increase. The division has idle capacity, so
Selling price ………………………………
$60
Variable costs …………………………….
40
Contribution margin …………………….
$20
Number of units …………………………
× 20,000
Added contribution margin ……………
$400,000
ROI would also increase.
4. 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
( )
$50 – $26 × 45,000
Transfer price $21 + = $21 + $9 = $30
120,000
³
64 Managerial Accounting for Managers, 4th Edition
Case 12A-7 (60 minutes)
1. The Electrical Division is presently operating at capacity; therefore, any
sales of X52 electrical fitting to the Brake Division will require that the
transfer price of:
Total contribution margin on lost sales
Variable cost
Transfer price +
per unit Number of units transferred
³
$4.25 + ($7.50 – $4.25)³Transfer price
$4.25 + $3.25³Transfer price
$7.50³Transfer price
fittings to the Brake Division for $5 would adversely affect these
performance measurements.
2. The key is to realize that the $8 in fixed overhead and administrative
costs contained in the Brake Division’s $49.50 “cost” per brake unit is
contract on the company’s profits. Another key is that the variable cost
of the Electrical Division is not relevant either. Whether the fittings are
fittings are transferred within the company.
Solutions Manual, Appendix 12A 65
Case 12A-7 (continued)
Selling price of the brake units …………………………...
$50.00
Less:
The cost of the fittings used in the brakes (i.e. the
lost revenue from sale of fittings to outsiders) …..
$ 7.50
Variable costs of the Brake Division excluding the
fitting ($22.50 + $14.00) ………………………………
36.50
44.00
Net positive effect on the company’s profit ……………
$ 6.00
3. As shown in part (1) above, the Electrical Division would insist on a
unit if it accepts the $7.50 transfer price.
Selling price of the brake units …………………………..
$50.00
Less:
Purchased parts (from outside vendors) …………….
$22.50
Electrical fitting X52 (assumed transfer price) ……..
7.50
Other variable costs ………………………………………
14.00
44.00
Brake Division contribution margin ……………………..
$ 6.00
4. It is in the best interests of the company and of the divisions to come to
an agreement concerning the transfer price. As demonstrated in part (3)
66 Managerial Accounting for Managers, 4th Edition
Case 12A-7 (continued)
a sham.
Our advice to top management would be to ask the two managers to
meet to discuss the transfer pricing decision. Top management should
not dictate a course of action or what is to happen in the meeting, but
themselves. Third, the managers may not be able to correctly analyze
the situation and may not understand what is actually in their own best
If the refusal to come to an agreement is the result of uncooperative
attitudes or an inability to correctly analyze the situation, top
consistent with decentralization. If the problem is uncooperative
economics and managerial accounting.