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Corporate Accounting 15-47 Analyze Transfer Pricing Data

Dakota Security Systems (DSS) is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Residential Division and Commercial Division both sell security and monitoring equipment. Residential sells primarily to home owners and apartment management companies. Commercial focuses on small to mediumsized businesses. Residential sells a particular alarm to the outside market for $255 per unit. The outside market can absorb up to 48,300 units per year. These units require 3 direct labor-hours each. If Residential modifies the units with an additional 0.75 hour of labor time, it can sell them to Commercial for $282 per unit. Commercial will accept up to 41,400 of these units per year. If Commercial does not obtain 41,400 units from Residential, it purchases them for $291 each from the outside. Commercial incurs $147 of additional labor and other out-of-pocket costs to convert the alarm (either from Residential or outside) into one that fits in an existing Commercial Division system. The units can be sold to the outside market for $651 each. Residential estimates that its total costs are $1,498,000 for fixed costs, $46.00 per direct labor-hour, and $21.60 per alarm for materials and other variable costs besides direct labor. Its capacity is limited to 226,500 direct labor-hours per year. Required: Determine the following: a. Total contribution margin to Residential if it sells 48,300 units outside. b. Total contribution margin to Residential if it sells 41,400 units to Commercial. c. and d. The costs to be considered in determining the optimal company policy for sales by Residential. The annual contributions and costs for Residential and Commercial under the optimal policy. Determine the following The costs to be considered in determining the optimal company policy for sales by Residential. The annual contributions and costs for Residential and Commercial under the optimal policy