Parkside, Inc. has several divisions that operate as decentralized profit centers. Parkside’s Entertainment division manufactures handheld gaming systems using the products of two of Parkside’s other divisions. The Plastics division manufactures plastic components, one of which is made exclusively for the Entertainment division. Other less complex components are sold on the open market. The Video Cards division sells its products, one of which is used by the Entertainment division, in a competitive market. The actual costs per unit for the products used by the Entertainment division are as follows.

The Plastics division sells its commercial products at full cost plus a 40% markup. Its manager believes the proprietary plastic component that is made for the Entertainment division would sell for $7.70 per unit on the open market. The market price of the video card the Entertainment division uses is $10.98 per unit.

Required

a. If upper management requires the video card to be transferred from the Video Card division to the Entertainment division at full cost, what behavior will the transfer likely motivate in the Video Card division?

b. If the Entertainment division can purchase a large quantity of comparable video cards from an outside source at $8.95 per unit and the Video Card division has excess capacity what transfer price should the Video Card division set? What could be the result of this action on Parkside’s profit?

c. If the Plastics department negotiated a transfer price of $6.00 per unit with the Entertainment division, what behavior would the transfer be likely to motivate in both departments?

Transcribed Image Text:

Plastic Component Video Card Direct materials $1.75 $ 2.80 Direct labor 2.35 3.25 Variable manufacturing overhead Fixed manufacturing overhead 1.00 1.75 0.40 2.55 Total cost $5.50 $10.35