Utilization of capacity. (J. Patell, adapted) The California Instrument Company (CIC) con¬

sists of the Semiconductor Division and the Process-Control Division, each of which oper¬

ates as an independent profit centre. The Semiconductor Division employs craftsmen who produce two different electronic components, the new high-performance Super-chip and an older product called Okay-chip. These two products have the following cost characteristics:

Super-chip Okay-chip Direct materials $ 2.40 $1.20 Direct manufacturing labour 2 hours X $16.80; 0.5 hours X $16.80 33.60 8.40 Annual overhead in the Semiconductor Division totals $400,000, all fixed. Owing to the high skill level necessary for the craftsmen, the semiconductor division’s capacity is set at 50,000 hours per year.

One customer orders a maximum of 15,000 Super-chips per year, at a price of $72 per chip. If CIC cannot meet this entire demand, the customer curtails its own production. The rest ofthe Semiconductor’s Division’s capacity is devoted to the Okay-chip, for which there is unlimited demand at $14.40 per chip.

The Process-Control Division provides only one product, a process-control unit, with the following cost structure:

Direct materials (circuit board) $72 Direct manufacturing labour (5 hours X $12) 60 Fixed overhead costs of the Process-Control Division are $96,000 per year. The current market price ofthe control unit is $158.40 per unit.

A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the process-control unit. Using Super-chip would require an extra hour oflabour per control unit for a new total of 6 hours per control unit.

Required 1. Calculate the contribution margin per hour of selling Super-chip and Okay-chip. If no transfers of Super-chip were made to the Process-Control Division, how many Super-chips and Okay-chips should the Semiconductor Division sell?

2. The Process-Control Division expects to sell 5,000 control units this year. From the viewpoint of California Instruments as a whole, should 5,000 Super-chips be transferred to the Process-Control Division to replace circuit boards? Show all calculations.

3. If demand for the control unit is sure to be 5,000 units, but its price is uncertain, what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for CIC as a whole? (All other data are unchanged.)

4. If demand for the control unit is sure to be 12,000 units, but its price is uncertain, what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for CIC as a whole? (All other data are unchanged.)