]Auckland Electronic manufacture produces breaks for car manufacturing industry. A special circuit PB12 is required for the break. The PB12 is produced in the Circuit Division and then transferred to the Break Division, where hardwires are installed. The Circuit Division has current capacity of producing 50,000 units of circuits and is operating at its full capacity. The division is selling PB12 to its regular customers for $7.90 each. Cost incurred to produce each unit of the circuit is $4.50 which includes: $1.50 direct material; $1.00 direct labour; $1.00 variable manufacturing; and $1.00 fixed manufacturing cost.

The company’s Break Division has asked the Circuit Division to supply a large quantity of PB12 to it for only $5.40 each. The Break Division, which is operating at 50% of capacity, will put the circuit into a break unit that it will produce and sell to a large car manufacturing company. The cost of the Break unit being built by the Break Division follows:

Purchased parts (from outside vendors)	$22.80
Circuit PB12	5.40
Other variable costs	14.00
Fixed overhead and administration	8.20
Total cost per Break unit	$50.40

Although the $5.40 price for the PB12 circuit represents a substantial discount from the regular $7.90 price, the manager of the Brake Division believes the price concession is necessary if his division is to get the contract for the brake units. He has informally leaned that the car manufacturer plans to reject his bid if it is more than $52 per brake unit. Thus, if the Brake Division is forced to pay the regular $7.90 price for the PB12 circuit, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Auckland Electronic uses return on investment (ROI) to measure divisional performance.

Required 3.1

Calculate the transfer price of the circuit for the Circuit Division, using the general transfer price rule. Show your workings. (2 marks)

[Word limit: 50 words. Note the word count at the end of your answer]

Required 3.2

If you were the manager of the Circuit Division, would you supply thePB12 to the Brake Division for $5.40 each as requested? Why or why not? (2 marks)

[Word limit: 50 words. Note the word count at the end of your answer]

Your answer (expand the space here):

Required 3.3

Assuming the brakes can be sold for $52, what is the financial advantage (disadvantage) for Auckland Electronic (on a per unit basis) if the Circuit Division supplies the circuit to the Brake Division? Explain your answer. (8 marks)

[Word limit: 300 words. Note the word count at the end of your answer]

Your answer: (Add/delete column and/or row if required :

Show your workings here (Use table if necessay. Expand the space as required):

Required 3.4

In principle, should it be possible for the two divisional managers to agree to a transfer price in this particular situation? Why or why not? Show your calculations.

Required 3.5

Discuss the organizational behaviour problems, if any, inherent in this situation. What would you advise the company’s president to do in this situation?