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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
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: 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. 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 Video Components 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 The Video Cards Division has excess capacity. The Entertainment Division decides to purchase a large quantity of video cards from an outside source at $8.70/unit rather than buying them from the Video Cards Division at $9.15. This action would likely: Optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside Inc. Allow evaluation of both divisions on the same basis. Cause mediocre behavior in the Video Cards Division as opportunity costs increases. Optimize the overall profit goals of Parkside Inc. Optimize the profit goals of both the Entertainment Division and Parkside Inc
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