In each of the cases below, assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

Case
A B
Division X:
Capacity in units 200,000 200,000
Number of units being sold to outside customers 200,000 160,000
Selling price per unit to outside customers $90 $75
Variable costs per unit $70 $60
Fixed costs per unit (based on capacity) $13 $8

Division Y:
Number of units needed for production 40,000 40,000
Purchase price per unit now being paid to an
outside supplier $86 $74

Required:
a. Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.
b. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.