profit centres. Milton’s Savvy Division manufactures scientific instruments and uses the products of two of Milton’s other divisions. The Bored Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Savvy Division using proprietary designs, whereas less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Savvy Division.
The costs per unit of the products used by the Savvy Division are presented below.
PCBTransistorDirect materials$2.50$ .80Direct labor4.501.00Variable overhead2.00.50Fixed cost .80 .75Total cost$9.80$3.05
The Bored Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Savvy Division would sell for $12.25 per unit on the open market. The market price of the transistor used by the Savvy Division is $3.70 per unit.
Assume that the Savvy Division is able to purchase a large quantity of transistors from an outside source at $2.90 per unit. The Transistor Division, having excess capacity, agrees to lower its transfer price to $2.90 per unit. This action would
A. allow evaluation of both divisions on the same basis.
B. subvert the profit goals of the Transistor Division while optimizing the profit goals of the Savvy Division.
C. cause mediocre behavior in the Transistor Division as lost opportunity costs increase.
D. optimize the overall profit goals of Milton Industries.
Hi there! Click one of our representatives below and we will get back to you as soon as possible.