Smart work Computer manufactures scanners in its two divisions: the ASSEMBLY Division and the COMPONENT Division. The COMPONENT Division produces circuit board that can be used by the ASSEMBLY Division. All the circuit boards this division produces can be sold to outside customers. However, from the beginning, nearly 90% of its output has been used internally. The COMPONENT Division transfers 35,000 circuit boards to Assembly Division at market price.

The manager of the COMPONENT Division can sell 40 000 units (the division’s capacity for this part) of Circuit board to outside buyers at $225 per unit. The ASSEMBLY Division could also buy the part for $225 from external suppliers. Component Division operates efficiently, and the following are details on the manufacturing cost of a circuit board:

Direct materials	$75.0
Direct labor	25.0
Variable overhead	15.0
Fixed overhead	10.0
Total unit cost	$125.0

The ASSEMBLY Division produces and sells 35 000 units of Model MO205 each year at a unit price of $670. The normal capacity of Assembly Division is 45 000 units. This Given current market conditions, this is the maximum price that the division can charge for Model MO205.

Recently, foreign competitors reduced their prices to $ 550. To match the latest market competition, Assembly Division would reduce the price from $670 to $ 550. This would put the price below the cost to produce and sell it. Bob Samarata, the general manager of this company got confused….. how could these firms sell for such a low price? To improve the profit of the Company as a whole and ASSEMBLY Division, the CEO of this company asked COMPONENT Division to transfer the circuit to ASSEMBLY Division for $180. The manager of the COMPONENT Division was not happy with this new policy.

Bob, has asked you to form a team to work on the cost analysis and provide a recommendation, on how the transfer price should be applied fairly between two divisions and how the Assembly department could match with the competitor’s price.

Below is some information related to MO205. The variable cost of manufacturing 35,000 units of the scanner as follows:

Setting up equipment	$ 1,250, 000
Materials handling	1,800, 000
Inspecting products	1,220, 000
Engineering support	1,200, 000
Handling customer complaints	700, 000
Filling warranties	570, 000
Storing goods	600,000
Expediting goods	1,000,000
Circuit board	9,000,000
Using other materials	500, 000
Using power	480, 000
Manual insertion labor	2,500, 000
Other direct labor	1,500, 000

The total Fixed cost (based on normal capacity) is $ 2,000,000 per year.

REQUIRED:

1. Compute the total contribution margin earned by each division

2. Compute the firm-wide total profit associated with Component and Model MO205

3. Given the new transfer pricing policy, predict how this will affect the total contribution margin of the Component and Assembly Division manager for Model MO205

4. Given your answers to requirement 1,2,3 compute the firm-wide profit. Give your comment, what has happened? Was CEO’s decision to apply a new transfer pricing policy fair to both divisions? Explain

5. Do you have any suggestions on how to improve the performance of the Assembly Division? What are recommended program(s) should be planned, explain the rationale of your program(s), and prove your recommendation with calculations.

6. Based on your balanced scorecard knowledge, provide a suggestion what are the best performance measures for both divisions? Draw a strategy map to show the linkages of the suggested performance measures

Answer rating: 100% (QA)

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