10. (30 points total) Avinash has just been brought in as the new CEO of Spring Palm, a maker of handheld personal digitial assistants (PDAs), Spring Palm is a vertically integrated producer, meaning that they produce all their own components. The main components of the PDA are the motherboard, the display, and the case, These components are assembled into the finished device. Avinash has asked his CFO to give him the weekly operating numbers, division by division, for SpringPalm, Avinash's first priority as the new CEO is to make sure that Spring Palm's decision to produce their own components is indeed profit maximizing. Device Assembly Motherboards Displays Labor and Materials 130,000 35,900 10,000 Direct overhead 20 000 80,800 20 INK Corporate overhead 10509 10.500 Division costs 160 00 165,000 125,000 Division reevenica 500 JHK Division net income The operating numbers are presented in the table above. The following notes are relevant to the interpretation of the data in the table: The cost and revenue numbers in the table above are for weekly production of 10,000 motherboards, displays, and cases, and therefore for 10,000 finished devices, SpringPalm's component divisions (namely, motherboards, displays, and cases) transfer their products internally to the device assembly division at the cost of labor and materials. This transfer pricing rule implies that a substantial part of the labor and materials expenditure in the device assembly division is internal transfer payments to the component divisions. Specifically, in the table above, the three component divisions together have total labor and materials costs of $100.000 per week ($55000 in motherboards, $35,000 in displays, and $10,000 in cases). Thus, the $130,000 weekly labor and materials expense for the device assembly division, is comprised of $100 000 in payments to the components divisions, and $30,000 in additional incremental expenditure. The transfer pricing rule also implies that the revenue accounted to each of the component divisions is equal to its labor and materials costs, In the table abo ve. revenues for motherboards, displays, and cases are $55000, $35000, and $10,000 respectively. . Direct overhead is made up of depreciation and capital expenditure for the equipment actually used in each division. In each division, one quarter of the direct overhead would be avoidable in the short run if the division produced no output, one half could be recovered in the long run if the division were shut down and the equipment were sold, and one quarter is completely unrecoverable. Corporate overhead is a fixed expenditure that could be neither reduced nor eliminated unless SpringPalm were to shut down entirely. Spring Palm could buy motherboards from an external supplier for $12 apiece, Displays could be purchased for $10 apiece, and cases for $1 apiece. Avinash expects these prices to hold for the forsecable future. a) (10 points) Should Avinash keep the motherboard division open in the short run or should be buy motherboards from an external supplier? In the long run? Explain. (The original table is reproduced here in case you find it helpful.) Device Assembly Motherboards Displays Cases Labor and Materials 130 DOD 35,800 Direct overhead 20 000 100,500 20800 Corporate overhead 10.000 10,800 1010 Division costs 160 800 165,000 125000 40 00 Division revenues $5.500 Division net income - 11030 - 30.800 by( 10 points) Should Avinash keep the display division open in the short run or should he buy displays from an external supplier? In the long run? Explain.(The original table is reproduced here in case you find it helpful.) Device Assembly Motherboards Displays Cases Labor and Materials 130,000 55.000 35,DO0 10,000 Direct overhead 20.000 100.000 20,000 Corporate overhead 10,000 10.000 10.000 10,000 Division costs 160,000 165.000 125000 Division revenues 500.000 $5.000 35.000 10 0080 Division net income 340,000 - 1 10,000 - 90 1080 - 30 ) c) (10 points) Should Avinash keep the case division open in the short run or should he buy cases from an external supplier? In the long run? Explain. (The original table is reproduced here in case you find it helpful.) Device Assembly Motherboards Displays Cases Labor and Materials 130.000 $5000 35.000 Direct overhead 20.000 100,000 20 DO Corporate overhead 10.000 10,000 10.000 Division costs 160 000 165.000 125 000 Division revenues 500 DOO 55,000 35 090 107000 Division Bel Income 340 000 - 1 10,000 - 90 020 - 307000