Problem 2

Edisonyc is an innovative electronics manufacturing firm that has multiple divisions, all of them operating as independent profit centers. Two of these divisions are the Microchips Division (MD) and the Audio Division (AD).

The MD produces and sells to the market three types of microchips for audio accessories: a high-performance A3-chip and two older products called A1-chip and A2-chip. These three products have the following costs per unit:

	A1-chip	A2-chip	A3-chip
Direct materials	$0.5	$1	$2
Direct labor	$1	$2	$3
Manufacturing overhead	$2	$3	$4

Manufacturing overhead in MD totals $50,000, is all fixed, and is allocated using machine hours as the allocation base. All three chips are essentially electric circuits that need to be printed by a machine with a total capacity of 5,000 machine hours (mhrs) a year. The required machining times per unit for the three chips are:

	A1-chip	A2-chip	A3-chip
Machine hours per chip	0.2	0.3	0.4

The current market price for the A3-chip is $16 per chip with a maximum external demand of 5,000 units per year. The maximum external demand for A2-chip is 8,000 units and it is sold at $9 per chip. The maximum external demand for A1-chip is 6,000 units and it is sold at $6 per chip.

The AD produces and sells audio products to the external market. A newly designed product is a headset with the following cost structure per unit:

• Direct materials (audio-circuit, bought to an external supplier): $18
• Direct labor: $50

Fixed overhead of the AD is $80,000 per year. The current market price for the audio-circuit is $18 per unit. The market price for the headset is $132.

A joint research project has just revealed that a single A3-chip can replace the audio-circuit currently used to make the headset. Using an A3-chip would increase the direct labor cost per headset at AD from $50 to $55 per unit.

Problem 2 -

If no transfers are made to the AD, how many A1-chips, A2-chips and A3-chips should the MD sell to the external market? That is, what is the optimal product mix? Show your computations.

Problem 2 - B

Take your result in Part A as the status quo for the MD. The AD expects to sell 8,000 headsets this year. If the divisions were allowed to negotiate the transfer price for the A3-chip would they trade? Are negotiations goal congruent?

Problem 2 - C

The AD still expects to sell 8,000 headsets this year.

1. If Edisonyc sets the transfer price for the A3-chip at its market price, is that a goal congruent transfer price?
2. The MD division allocates all the manufacturing overhead using machine hours as the allocation base. If Edisonyc sets the transfer price for the A3-chip at its full cost plus a 30% markup, is that a goal congruent transfer price?