General Instrumentation Company manufactures dashboard instruments for heavy construction equipment The firm is based in Baltimore, but operates several divisions in the United States, Canada, and Europe The Hudson Bay Division manufactures complex electrical panels that are used in a variety of the firms instruments There are two basic types of panels The high density panel (HDP) is capable of many functions and is used in the most sophisticated instruments, such as tachometers and pressure gauges The low density panel (LDP) is much simpler and is used in less complicated instruments Although there are minor differences among the different high density panels, the basic manufacturing process and production costs are the same The high density panels require considerably more skilled labor than the low density panels, but the unskilled labor needs are about the same Moreover, the direct materials in the high density panel run substantially more than the cost of materials in the low density panels Production costs are summarized as follows LDP HDP Unskilled labor (0 5 hour $10) $ 5 $ 5 Skilled labor LDP (0 25 hour $20) 5 HDP (1 5 hours $20) 30 Raw material 3 8 Purchased components 4 12 Variable overhead 5 15 Total variable cost $ 22 $ 70 The annual fixed overhead in the Hudson Bay Division is $1,000,000 There is a limited supply of skilled labor available in the area, and the division must constrain its production to 40,000 hours of skilled labor each year This has been a troublesome problem for Jacqueline Ducharme, the division manager Ducharme has successfully increased demand for the LDP line to the point where it is essentially unlimited Each LDP sells for $28 Business also has increased in recent years for the HDP, and Ducharme estimates the division could now sell anywhere up to 6,000 units per year at a price of $115 On the other side of the Atlantic, General Instrumentation operates its Volkmar Tachometer Division in Berlin A recent acquisition of General Instrumentation, the division was formerly a German company known as Volkmar Construction Instruments The divisions main product is a sophisticated tachometer used in heavy duty cranes, bulldozers, and backhoes The instrument, designated as a TCH320, has the following production costs TCH320 Unskilled labor (0 5 hour $9) $ 4 50 Skilled labor (3 hours $17) 51 00 Raw material 11 50 Purchased components 150 00 Variable overhead 11 00 Total variable cost $ 228 00 The cost of purchased components includes a $145 control pack currently imported from an Asian electronics Company Fixed overhead in the Volkmar Tachometer Division runs about $800,000 per year Both skilled and unskilled labor are in abundant supply The TCH320 sells for $270 Bertram Mueller, the division manager of the Volkmar Tachometer Division, recently attended a high level corporate meeting in Baltimore In a conversation with Jacqueline Ducharme, it was apparent that Hudson Bays high density panel might be a viable substitute for the control pack currently imported from Japan and used in Volkmars TCH320 Upon returning to Berlin, Mueller asked his chief engineer to look into the matter Hans Schmidt obtained several HDP units from Hudson Bay, and a minor R D project was mounted to determine if the HDP could replace the Japanese control pack Several weeks later, the following conversation occurred in Muellers office Schmidt Theres no question that Hudson Bays HDP unit will work in our TCH320 In fact, it could save us some money Mueller Thats good news If we can buy our components within the company, well help Baltimores bottom line without hurting ours Also, it will look good to the brass at corporate if they see us working hard to integrate our division into General Instrumentations overall production program Schmidt Ive also been worried about the reliability of supply of the control pack I dont like being dependent on such a critical supplier that way Mueller I agree Lets look at your figures on the HDP replacement Schmidt I got together with the controllers people, and we worked up some numbers If we replace the imported control pack with the HDP from Canada, well avoid the $145 control pack cost were now incurring In addition, I figure well save $5 50 on the basic raw materials There is one catch, though The HDP will require some adjustments in order to use it in the TCH320 We can make the adjustments here in Berlin Im guessing it will require an additional two hours of skilled labor to make the necessary modifications I dont think variable overhead would be any different Then there is the cost of transporting the HDPs to Berlin Lets figure on $4 50 per unit Mueller Sounds good Ill give Jacqueline Ducharme a call and talk this over We can use up to 10,000 of the HDP units per year given the demand for the TCH320 I wonder what kind of a transfer price Hudson Bay will want Required 2 a Compute the unit contribution margin of an LDP and an HDP Compute the unit contribution margin of an LDP and an HDP Unit Contribution Margin LDP HDP 2 b Compute the unit contribution margin of Volkmar's TCH 320 under each of its alternatives Compute the unit contribution margin of Volkmar's TCH 320 under each of its alternatives (Round your answers to 2 decimal places ) TCH 320 Using Imported Control Pack TCH 320 Using an HDP Price Less Variable cost Unskilled labor Skilled labor Raw material Purchased components Variable overhead Variable cost of manufacturing HDP Variable cost of transporting HDP Total variable cost Unit contribution margin 2 c What is the unit contribution to cover company's fixed cost and profit per hour of skilled labor (scarce resource) for the following What is the unit contribution to cover company's fixed cost and profit per hour of skilled labor (scarce resource) for the following (Round Skilled labor hour to 2 decimal places ) Unit Contribution Margin Skilled Labor hour per unit required at Hudson Bay Contribution Margin per hour HDP sold externally HDP transferred internally LDP 2 d From the perspective of General Instrumentations top management, how many panels should be produced for each of the following purposes From the perspective of General Instrumentations top management, how many panels should be produced for each of the following purposes Number of Panels HDP sold externally HDP transferred internally LDP 3 Assume that Hudson Bay agrees to transfer 10,000 HDP units per year to Volkmar using a transfer price equal to its current selling price of $115 If Volkmar is able to get Hudson Bay to agree to a lower transfer price, what effect will this have on General Instrumentation's income Assume that Hudson Bay agrees to transfer 10,000 HDP units per year to Volkmar using a transfer price equal to its current selling price of $115 If Volkmar is able to get Hudson Bay to agree to a lower transfer price, what effect will this have on General Instrumentation's income General Instrumentation's income will 4 What is the minimum transfer price that the Hudson Bay Division would find acceptable for the HDP What is the minimum transfer price that the Hudson Bay Division would find acceptable for the HDP Minimum transfer price 5 What is the maximum transfer price that the Volkmar Tachometer Division would find acceptable for the HDP What is the maximum transfer price that the Volkmar Tachometer Division would find acceptable for the HDP Maximum transfer price 6 From the perspective of the corporate controller for General Instrumentation, what transfer price range would you recommend the two divisions negotiate within for the HDP units From the perspective of the corporate controller for General Instrumentation, what transfer price range would you recommend the two divisions negotiate within for the HDP units Transfer price range from to

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General Instrumentation Company manufactures dashboard instruments for heavy construction equipment. The firm is based in Baltimore, but operates several divisions in the United States, Canada,

General Instrumentation Company manufactures dashboard instruments for heavy construction equipment. The firm is based in Baltimore, but operates several divisions in the United States, Canada, and Europe. The Hudson Bay Division manufactures complex electrical panels that are used in a variety of the firms instruments. There are two basic types of panels. The high-density panel (HDP) is capable of many functions and is used in the most sophisticated instruments, such as tachometers and pressure gauges. The low-density panel (LDP) is much simpler and is used in less-complicated instruments. Although there are minor differences among the different high-density panels, the basic manufacturing process and production costs are the same. The high-density panels require considerably more skilled labor than the low-density panels, but the unskilled labor needs are about the same. Moreover, the direct materials in the high-density panel run substantially more than the cost of materials in the low-density panels. Production costs are summarized as follows:

	LDP		HDP
Unskilled labor (0.5 hour @ $10)	$	5	$	5
Skilled labor:
LDP (0.25 hour @ $20)		5
HDP (1.5 hours @ $20)				30
Raw material		3		8
Purchased components		4		12
Variable overhead		5		15
Total variable cost	$	22	$	70

The annual fixed overhead in the Hudson Bay Division is $1,000,000. There is a limited supply of skilled labor available in the area, and the division must constrain its production to 40,000 hours of skilled labor each year. This has been a troublesome problem for Jacqueline Ducharme, the division manager. Ducharme has successfully increased demand for the LDP line to the point where it is essentially unlimited. Each LDP sells for $28. Business also has increased in recent years for the HDP, and Ducharme estimates the division could now sell anywhere up to 6,000 units per year at a price of $115.

On the other side of the Atlantic, General Instrumentation operates its Volkmar Tachometer Division in Berlin. A recent acquisition of General Instrumentation, the division was formerly a German company known as Volkmar Construction Instruments. The divisions main product is a sophisticated tachometer used in heavy-duty cranes, bulldozers, and backhoes. The instrument, designated as a TCH320, has the following production costs.

TCH320
Unskilled labor (0.5 hour @ $9)	$	4.50
Skilled labor (3 hours @ $17)		51.00
Raw material		11.50
Purchased components		150.00
Variable overhead		11.00
Total variable cost	$	228.00

The cost of purchased components includes a $145 control pack currently imported from an Asian electronics Company. Fixed overhead in the Volkmar Tachometer Division runs about $800,000 per year. Both skilled and unskilled labor are in abundant supply. The TCH320 sells for $270.

Bertram Mueller, the division manager of the Volkmar Tachometer Division, recently attended a high-level corporate meeting in Baltimore. In a conversation with Jacqueline Ducharme, it was apparent that Hudson Bays high-density panel might be a viable substitute for the control pack currently imported from Japan and used in Volkmars TCH320. Upon returning to Berlin, Mueller asked his chief engineer to look into the matter. Hans Schmidt obtained several HDP units from Hudson Bay, and a minor R&D project was mounted to determine if the HDP could replace the Japanese control pack. Several weeks later, the following conversation occurred in Muellers office:

Schmidt:	Theres no question that Hudson Bays HDP unit will work in our TCH320. In fact, it could save us some money.
Mueller:	Thats good news. If we can buy our components within the company, well help Baltimores bottom line without hurting ours. Also, it will look good to the brass at corporate if they see us working hard to integrate our division into General Instrumentations overall production program.
Schmidt:	Ive also been worried about the reliability of supply of the control pack. I dont like being dependent on such a critical supplier that way.
Mueller:	I agree. Lets look at your figures on the HDP replacement.
Schmidt:	I got together with the controllers people, and we worked up some numbers. If we replace the imported control pack with the HDP from Canada, well avoid the $145 control pack cost were now incurring. In addition, I figure well save $5.50 on the basic raw materials. There is one catch, though. The HDP will require some adjustments in order to use it in the TCH320. We can make the adjustments here in Berlin. Im guessing it will require an additional two hours of skilled labor to make the necessary modifications. I dont think variable overhead would be any different. Then there is the cost of transporting the HDPs to Berlin. Lets figure on $4.50 per unit.
Mueller:	Sounds good. Ill give Jacqueline Ducharme a call and talk this over. We can use up to 10,000 of the HDP units per year given the demand for the TCH320. I wonder what kind of a transfer price Hudson Bay will want.

Required:

2-a. Compute the unit contribution margin of an LDP and an HDP.

Compute the unit contribution margin of an LDP and an HDP.

	Unit Contribution Margin
LDP
HDP

2-b. Compute the unit contribution margin of Volkmar's TCH-320 under each of its alternatives.

Compute the unit contribution margin of Volkmar's TCH-320 under each of its alternatives. (Round your answers to 2 decimal places.)

	TCH-320 Using Imported Control Pack	TCH-320 Using an HDP
Price
Less: Variable cost:
Unskilled labor
Skilled labor
Raw material
Purchased components
Variable overhead
Variable cost of manufacturing HDP
Variable cost of transporting HDP
Total variable cost
Unit contribution margin

2-c. What is the unit contribution to cover company's fixed cost and profit per hour of skilled labor (scarce resource) for the following.

What is the unit contribution to cover company's fixed cost and profit per hour of skilled labor (scarce resource) for the following. (Round "Skilled labor hour" to 2 decimal places.)

	Unit Contribution Margin	Skilled Labor hour per unit required at Hudson Bay	Contribution Margin per hour
HDP sold externally
HDP transferred internally
LDP

2-d. From the perspective of General Instrumentations top management, how many panels should be produced for each of the following purposes?

From the perspective of General Instrumentations top management, how many panels should be produced for each of the following purposes?

	Number of Panels
HDP sold externally
HDP transferred internally
LDP

3. Assume that Hudson Bay agrees to transfer 10,000 HDP units per year to Volkmar using a transfer price equal to its current selling price of $115. If Volkmar is able to get Hudson Bay to agree to a lower transfer price, what effect will this have on General Instrumentation's income?

Assume that Hudson Bay agrees to transfer 10,000 HDP units per year to Volkmar using a transfer price equal to its current selling price of $115. If Volkmar is able to get Hudson Bay to agree to a lower transfer price, what effect will this have on General Instrumentation's income?

General Instrumentation's income will

4. What is the minimum transfer price that the Hudson Bay Division would find acceptable for the HDP?

What is the minimum transfer price that the Hudson Bay Division would find acceptable for the HDP?

Minimum transfer price

5. What is the maximum transfer price that the Volkmar Tachometer Division would find acceptable for the HDP?

What is the maximum transfer price that the Volkmar Tachometer Division would find acceptable for the HDP?

Maximum transfer price

6. From the perspective of the corporate controller for General Instrumentation, what transfer price range would you recommend the two divisions negotiate within for the HDP units?

From the perspective of the corporate controller for General Instrumentation, what transfer price range would you recommend the two divisions negotiate within for the HDP units?