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P15-11 Transfer pricing; divisional performance Time allowed: 4S minutes Stanco plc is a decentralized organization with five divisions. The company's Electronics Division produces a variety

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P15-11 Transfer pricing; divisional performance Time allowed: 4S minutes Stanco plc is a decentralized organization with five divisions. The company's Electronics Division produces a variety of electronics items, including an XL.S circuit board. The division (which is operating at capacity) sells the XLS circuit board to regular customers for 12.50 each. The circuit boards have a variable produc tion cost of 8.25 each. The company's Clock Division has asked the Electronics Division to supply it with a large quantity of XLS circuit boards for only 9 each. The Clock Division, which is operating at only 60% of capacity, will put the circuit boards into a timing device that it will produce and sell to a large oven manufacturer. The cost of the timing device being manufactured by the Clock Division follows XL5 circuit board (desired cost) Other purchased parts (from outside vendors) Other variable costs Fixed overhead and administrative costs Total cost per timing device 9.00 30.00 20.75 10.00 69.75 The manager of the Clock Division feels that she can't quote a price greater than 70 per timing device to the oven manufacturer if her divislon is to get the job. As shown above, in order to keep the price at 670 or less, she can't pay more than E9 per unit to the Electronics Division for the XLS circuit boards. Although the 9 price for the XLS circuit boards represents a substantial discount fromthe nornal 12.50 price, she feels that the price concession is necessary for her division to get the oven manufacturer contract and thereby keep its core of highly trained people. The company uses return on investment (ROI) to measure divislonal performance. Required 1 Assume that you are the manager of the Electronics Division. Would you recommend that your division supply the XL5 circuit boards to the Clock Divislon for 9 each as requested? Why or why not? Show all computations. Would it be profitable for the company as a whole for the Electronics Division to supply the Clock Division with the circuit boards for E9 each? Explain your answer. In principle, should it be possible for the two managers to agree to a transfer price in this particular situ ation? If so, within what range would that transfer price lie? Discuss the organizational and manager behaviour problems, if any, inherent in this situation. What would you advise the company's CEO to do in this situation? 2 3 4

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