Utilization of Capacity (J. Patell) The California Instrument Company

(CIC) consists of the Semiconductor Division and the Minicomputer Division, each of which operates as an independent profit center. 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 Material Parts $ 2.00 Parts $1.00 Labor 2 hours @ $14.00 28.00 v2 hour @ $14.00 7.00 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.

To date, only one customer has developed a product utilizing Super-chip, and this customer orders a maximum of 15,000 Super-chips per year, at a price of $60 per chip. If CIC cannot meet his entire demand, the customer curtails his own production. The rest of Semiconductor’s capacity is devoted to Okaychip, for which there is unlimited demand at $12 per chip.

The Minicomputer Division produces only one product, a process-control unit, which requires a complex circuit board imported from Sweden at a price of $60. The control unit’s costs are:

CONTROL UNIT Material Circuit board $60 Other parts 8 Labor 5 hours @ $10 50 The Minicomputer Division is composed of only a small assembly plant and all overhead is fixed at a total of $80,000 per year. The current market price for the control unit is $140 per unit.
A joint research project has just revealed that with minor modifications, a single Super-chip could be substituted for the circuit board currently used by the Minicomputer Division. The modification would require an extra 1 hour of labor by Minicomputer’s staff, for a new total of 6 hours per control unit. Minicomputer has therefore asked Semiconductor to declare a transfer price at which the Semiconductor Division would sell Super-chip internally.
. Minicomputer expects to sell 5,000 control units this year. From the overall viewpoint of California Instruments, how many Super-chips should be transferred to Minicomputer to replace circuit boards?
_ If demand for the control unit is sure to be 5,000 units, but its price zs uncertain, what should the transfer price of Super-chip be to ensure proper decisions?
(All other data unchanged.)
_ If demand for the control unit rises to 12,000 units at a price of $140 per unit, how many of the 12,000 units should be built using Super-chip? (All other data unchanged.) lop1