1. The Caplow Company is a multidivisional company, and its managers have been delegated full profit responsibility and complex autonomy to accept or reject transfers from other divisions. Division A produces a subassembly with a ready competitive market. This subassembly is currently used by Division B for a final product that is sold outside at $1,200.Division A charges Division B market price for the subassembly, which is $700 per unit. Variable costs are $520 and $600 for Divisions A and B, respectively. The manager of Division B feels that Division A should transfer the subassembly at a lower price than market because at this price, Division B is unable to make a profit.
1. Compute Division B's profit contribution if transfers are made at the market price, and also the total contribution to profit for the company.
2. Assume that Division A can sell all its production in the open market. Should Division A transfer goods to Division B? If so, at what price?
3. Assume that Division A can sell in the open market only 500 units at $700 per unit out of the 1,000 units that it can produce every month, and that a 20 percent reduction in price is necessary to sell full capacity. Should transfers be made? If so, how many units should it transfer and at what price? Submit a schedule showing comparisons of contribution margins under three different alternatives to support your decision.