The Orsilo Corporation makes and sells 10,000 multi system music players each year. Its Assembly Division purchases
Question:
A critical component of the CD player is the head mechanism that reads the disc. To ensure the quality of its multisystem music players, Orsilo requires that if Johnson wins the contract to supply CD players, it must purchase the head mechanism from Orsilo's Compact Disc Division for $20 each.
The Compact Disc Division can manufacture at most 12,000 CD players annually. It also manufactures as many additional head mechanisms as can be sold. The incremental cost of manufacturing the head mechanism is $15 per unit. The incremental cost of manufacturing a CD player (including the cost of the head mechanism) is $25 per unit, and any number of CD players can be sold for $35 each in the external market.
REQUIRED
1. What are the incremental costs minus revenues from sales to external buyers for the company as a whole if the Compact Disc Division transfers 10,000 CD players to the Assembly Division and sells the remaining 2,000 CD players on the external market?
2. What are the incremental costs minus revenues from sales to external buyers for the company as a whole if the Compact Disc Division sells 12,000 CD players on the external market and the Assembly Division accepts Johnson's offer at (a) $38 per CD player or (b) $45 per CD player?
3. What is the minimum transfer price per CD player at which the Compact Disc Division would be willing to transfer 10,000 CD players to the Assembly Division?
4. Suppose that the transfer price is set to the minimum computed in requirement 3 plus $1, and the division managers at Orsilo are free to make their own profit-maximizing sourcing and selling decisions. Now, Johnson offers 10,000 CD players for $40.50 each.
a. What decisions will the managers of the Compact Disc Division and Assembly Division make?
b. Are these decisions optimal for Orsilo as a whole?
c. Based on this exercise, at what price would you recommend the transfer price be set?
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
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