30,000
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 ar-
guing strenuously for $85 while the selling division argues just as
strongly for $89.
Problem 12-24 (continued)
b. The loss in potential profits to the company as a whole will be:
Beta Division’s outside purchase price ... $89
Alpha Division’s variable cost on the internal transfer.... 85
Potential added contribution margin lost to the com-
pany as a whole... $ 4
Number of units ... × 30,000
Potential added contribution margin and company
profits forgone... $120,000
Another way to derive the same answer is to look at the loss in po-
tential profits for each division and then total the losses for the im-
pact on the company as a whole. The loss in potential profits in Alpha
Division will be:
Suggested selling price per unit ... $88
Potential added contribution margin per unit... $ 3
Number of units ... × 30,000
Potential added contribution margin and divisional
profits forgone... $ 90,000
The loss in potential profits in Beta Division will be:
Outside purchase price per unit ... $89
Suggested price per unit inside... 88
Potential cost avoided per unit... $ 1
profits forgone... $ 30,000
The total of these two amounts equals the $120,000 loss in potential
profits for the company as a whole.
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