Mitachlordion Technology, Inc. (MTI), has two divisions: Birmingham and Tampa. Birmingham currently sells a diode reducer to manufacturers of aircraft navigation systems for $1,550 per unit. Variable costs amount to $1,000, and demand for this product currently exceeds the division’s ability to supply the marketplace.
Despite this situation, MTI is considering another use for the diode reducer, namely, integration into a satellite positioning system that would be made by Tampa. The positioning system has an anticipated selling price of $2,800 and requires an additional $1,340 of variable manufacturing costs. A transfer price of $1,500 has been established for the diode reducer.
Top management is anxious to introduce the positioning system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining needed diode reducers.
Birmingham and Tampa are in the process of recovering from previous financial problems, and neither division can afford any future losses. The company uses responsibility accounting and ROI in measuring divisional performance, and awards bonuses to divisional management.
Required:
1. How would Birmingham’s divisional manager likely react to the decision to transfer diode reducers to Tampa? Show computations to support your answer.
2. How would Tampa’s divisional management likely react to the $1,500 transfer price? Show computations to support your answer.
3. Assume that a lower transfer price is desired. Should top management lower the price or should the price be lowered by another means? Explain.
4. From a contribution margin perspective, does MTI benefit more if it sells the diode reducers externally or transfers the reducers to Tampa? By how much?