Parkside Inc. has three divisions (Entertainment, Plastics, and Video Card), each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows:

1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division). In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers.

2. The Entertainment Division purchases, for each unit it produces, a video card from Parkside's Video Card Division, which also sells this video card externally (to other producers). The per-unit manufacturing costs associated with each of the above two items, as incurred by the Plastic Components Division and the Video Card Division, respectively, are:

Plastic Components Video Cards

Direct material$1.25 $2.40

Direct labor 2.35 3.00

Variable overhead 1.00 1.50

Fixed overhead 0.40 2.25

Total cost$ 5.00 $9.15

Assume that the Plastics Division has excess capacity and has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price will likely:

Multiple Choice is:

• Motivate the Plastics Division to increase the portion of its manufacturing devoted to the Entertainment Division.
• Demotivate the Plastics Division, causing mediocre performance.
• Encourage the Entertainment Division to seek an outside source for plastic components.
• Cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
• Motivate both divisions because estimated profits will be shared.