Deitz is a publishing company with a number of different

Deitz is a publishing company with a number of different magazines and other publications. The company also owns a printing operation called Saira Press. The publications and the printing operation each operate as a separate profit center. The printing operation earns revenue by printing magazines and other publications owned by Deitz, as well as publications of other companies. The printing operation bills out at $0.025 per page. A manager from Winner!, one of Deitz’s magazines, has approached the manager of the printing operation offering to pay $0.016 per page for 20,000 copies of a 64-page magazine. The magazine pays outside printers $0.018 per page. The printing operation’s variable cost per page is $0.014.

Determine whether the printing should be done internally or externally, and the appropriate transfer price, under each of the following situations.
(a) Assume that the printing operation is booked solid for the next two years, and it would have to cancel an obligation with an outside customer in order to meet the needs of the internal division.
(b) Assume that the printing operation has available capacity.
(c) The top management of Deitz believes that the printing operation should always do the printing for the company’s magazines. On a number of occasions, it has forced the printing operation to cancel jobs with outside customers in order to meet the needs of its own publications. Discuss the pros and cons of this approach.
(d) Calculate the change in contribution margin to each division, and to the company as a whole, if top management forces the printing operation to accept the $0.016 per page transfer price when it has no available capacity.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...


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