Clinton Corporation has two decentralized divisions, Alpha and Beta. Alpha always has purchased certain units from Beta at $95 per unit. Beta plans to raise the price to $133 per unit, the price it receives from outside customers. As a result, Alpha is considering buying these units from outside suppliers for $95 per unit. Beta's costs follow: Variable costs per unit $ 88 Annual fixed costs $ 140,000 Annual production of these units sold to Alpha 10,000 units Required: a. If Alpha buys from an outside supplier, the facilities that Beta uses to manufacture these units will remain idle. What will be the result if Clinton enforces a transfer price of $133 per unit between Alpha and Beta?

Question

Business

Slinky

30 March, 01:31

Clinton Corporation has two decentralized divisions, Alpha and Beta. Alpha always has purchased certain units from Beta at $95 per unit. Beta plans to raise the price to $133 per unit, the price it receives from outside customers. As a result, Alpha is considering buying these units from outside suppliers for $95 per unit. Beta's costs follow: Variable costs per unit $ 88 Annual fixed costs $ 140,000 Annual production of these units sold to Alpha 10,000 units Required: a. If Alpha buys from an outside supplier, the facilities that Beta uses to manufacture these units will remain idle. What will be the result if Clinton enforces a transfer price of $133 per unit between Alpha and Beta?

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Mona · Answer 1

a. As a result of this policy the Clinton corporation will loss the contribution margin

Contribution Margin = (Selling price - variable cost) * Number of units

= (95 - 88) * 10,000

= $77,000

b. The cost incurred by Clinton corporation by following this policy is Opportunity cost which is cost of forgone opportunity.

Opportunity cost = (Outside selling price - variable cost) Number of units

= (133 - 88) * 10,000

= $450,000.