Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow:

* For Manufacturing, this is the price to third parties.
€  For Marketing this does not include the transfer price paid to Manufacturing
Required
a. Current production levels in Manufacturing are 600,000 units. Marketing requests an additional 100,000 units to produce a special order. What transfer price would you recommend?
Why?
b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? Why?
c. Suppose Atascadero management decides that a dual-rate system will lead the two divisions to cooperate. Manufacturing continues to operate at full capacity. Management sets a transfer price for Manufacturing to receive (as revenue) at $1,400 and a transfer price for Marketing to pay (as a cost) at $560. From a management control viewpoint, assess the value of the dual-rate system to your recommended system obtained in requirement (b).

Transcribed Image Text:

Manufacturing 1,000,000 $1,400 $560 Marketing 500,000 $4,550 $1,680 $7,200,000 Capacity (units). Sales price* .$%10,000,0007