*** MANAGERIAL ACCOUNTING ***

X-Com is a computer manufacturer located in the United States. A key component of their computer is the y-chip; Each computer needs one y-chip. All y-chips are produced by the "Y-Chip Division" of X-Com, and the Y-Chip Division is located in India. X-Com's Computer Division (located in the US) purchases all its y-chip needs from the Y-Chip Division. Y-Chip Division has the capacity to produce 150,000 chips.

Price and cost information for the two divisions are as follows:

Sales price of computer --- $850

Variable manufacturing cost per computer (excluding the y-chip cost) for the Computer Division:

Materials --------------------- $400

Labor ------------------------- $250

Additional parts cost if y-chip is purchased externally -- $5

Fixed costs of the Computer Division per year --- $2,000,000

Variable cost of the y-chip division (per chip):

Variable manufacturing cost ---- $60

Variable selling cost (if y-chip is sold to external customers) ---- $2

Selling price of the y-chip for external customers ---- $95

Buying price of the y-chip from external suppliers --- $85

** Assume that the company manufactures 150,000 computers and both divisions have no changes in inventory. There are no fixed costs associated with the Y-Chip Division. Income tax rates are as follows: India 40%, United States 30% **

Calculate the pre- and post-tax operating income for each division and the company at the following transfer prices:

1.) Transfer Price--- At $85

2.) Transfer Price--- At $60

3.) Transfer Price--- At $72.50

Based on your calculated pre/post tax operating income for each division and the company at given Transfer Prices, what is the general conclusion?

*Note: Do the calculation for $85 transfer price manually. Then, set-up a formula-based Excel sheet to calculate the pre-and post-tax profits. Make sure that you set-up your Excel sheet so that when you change the two appropriate cells, everything else will change automatically.