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?