Question: The following information relates to a new computer chip that Hand Held has developed for its new mobile phone that contains a personal organiser: Chip
The following information relates to a new computer chip that Hand Held has developed for its new mobile phone that contains a personal organiser:
Chip division
Market price of finished chip to outsiders
$24
Variable cost per unit
$12
Contribution margin
$12
Total contribution for 30,000 units
$360,000
Mobile phone division
Market price of finished products
$128
Variable costs:
From chip division
$12
Other direct materials
$50
Mobile phone division
Assembly
$38
Packaging
$20
Contribution margin
$8
Total contribution for 20,000 units
$160,000
The variable costs of the mobile phone division will be incurred whether it buys from the chip division or from an outside supplier.
Required(a)What is the highest price that the managers of the mobile phone division would want to pay the chip division for the chip? Explain.
(b)If the chip division is working at full capacity and cannot produce additional units, what transfer price for the chip would be best for the entity as a whole? Explain.
(c)If the chip division is not operating at capacity and has no prospect of reaching capacity, what is the lowest price its managers would typically be willing to sell chips to the mobile phone division for?
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