Question

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?

Answer 1

Answer:

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.