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23 March, 23:29

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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  1. 23 March, 23:43
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    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.
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