Stavos Company€™s Screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen is:
Variable cost per screen . . . . . . . . . . . . . $ 70
Fixed cost per screen . . . . . . . . . . . . . . . 30 *
Total cost per screen . . . . . . . . . . . . . . . $ 100
* Based on a capacity of 10,000 screens per year.
Part of the Screen Division€™s output is sold to outside manufacturers of HDTVs and part is sold to Stavos Company€™s Quark Division, which produces an HDTV under its own name. The Screen Division charges $ 140 per screen for all sales. The costs, revenue, and net operating income associated with the Quark Division€™s HDTV are given below:

The Quark Division has an order from an overseas source for 1,000 HDTVs. The overseas source wants to pay only $ 340 per unit.

Required:
1. Assume that the Quark Division has enough idle capacity to fill the 1,000-unit order. Is the division likely to accept the $ 340 price or to reject it? Explain.
2. Assume that both the Screen Division and the Quark Division have idle capacity. Under these conditions, would it be advantageous for the company as a whole if the Quark Division rejects the $ 340 price? Show computations to support your answer.
3. Assume that the Quark Division has idle capacity but that the Screen Division is operating at capacity and could sell all of its screens to outside manufacturers. Compute the profit impact to the Quark Division of accepting the 1,000-unit order at the $ 340 unit price.
4. What conclusions do you draw concerning the use of market price as a transfer price in intra-companytransactions?

Transcribed Image Text:

$480 Variable cost per unit: Cost of the screen ..$140 Variable cost of electronic parts .210 Total variable cost Contribution margin. Fixed costs per unit Net operating income per unit... 350 130 80 $ 50 Based on a capacity of 3,000 units per year.