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AB Company specialises in electronic products. Division A makes
integrated circuits and sells 90% of its output to outside companies.
This division is operating well below capacity.
Division B has developed a new product codenamed XK120 that could use
the circuit made by Division A. The manager of Division A has quoted a
transfer price of $80 per circuit, which is below the current market
price, and which would provide a $40 contribution margin.
The accountant of Division B has provided the following estimates of costs for XK120:
|Materials, including $80 for one circuit
|Selling and administrative expenses**
* $40 fixed, $40 variable
** $10 fixed, $10 variable
The marketing manager of Division B has submitted the following estimates of their demand schedule for XK120:
Division A has enough capacity to meet the 12 000 maximum volume that Division B could obtain.
Divisional managers are evaluated on ROI, and total investment would
be the same for any of the volumes that Division B may sell.
(a) As the manager of Division B, given the transfer price of $80,
what price would you charge for XK120 and what volume would you sell? (3
(b) Given the price calculated in (a), what total contribution would be earned by:
(i) Division A?
(ii) Division B?
(d) From the point of view of the managing director of AB Company,
what price should Division B charge for XK120, and what volume should be
sold in order to maximise return on investment for the company as a
whole? (2 marks)