Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions:

Case
1 2 3 4
Alpha Division:
Capacity in units 80,000 400,000 150,000 300,000
Number of units now
being sold to outside customers 80,000 400,000 100,000 300,000
Selling price per unit to
outside customers $30 $90 $75 $50
Variable costs per unit $18 $65 $40 $26
Fixed costs per unit (based on capacity) $6 $15 $20
Beta Division:
Number of units needed annually 5,000 30,000 20,000 $9
Purchase price now being paid to-
an outside supplier $27 $89 $75* 120,000
*Before any purchase discount.

Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated.
Required:
1. Refer to case 1 shown above. Alpha Division can avoid $2 per unit in commissions on any sales to Beta Division. Will the managers agree to a transfer, and if so, within what range will the transfer price be? Explain.
2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division.
a. Would you expect any disagreement between the two divisional managers over what the transfer price should be?
Explain.
b. Assume that Alpha Division offers to sell 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole?

Zachary company produces commercial gardening equipment. since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing. the costs and cost drivers associated with the four overhead activity cost pools follow: activities unit level batch level product level facility level cost $ 64,800 $ 27,730 $ 15,000 $ 154,000 cost driver 2,400 labor hrs. 47 setups percentage of use 11,000 units production of 780 sets of cutting shears, one of the company’s 20 products, took 240 labor hours and 7 setups and consumed 15 percent of the product-sustaining activities. required: (a) had the company used labor hours as a company wide allocation base, how much overhead would it have allocated to the cutting shears? (b) how much overhead is allocated to the cutting shears using activity-based costing? (c) compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 780 units are produced. if direct product costs are $150 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system? (d) assuming that activity-based costing provides a more accurate estimate of cost, indicate whether the cutting shears would be over- or underpriced if direct labor hours are used as an allocation base. explain how over-or undercosting can affect vaulker's profitability. (e) comment on the validity of using the allocated facility-level cost in the pricing decision. should other costs be considered in a cost- plus pricing decision? if so, which ones? what costs would you include if you were trying to decide whether to accept a special order?