Setting Transfer Prices$$Market Price versus Full Cost

Lansing Electronics Inc. manufactures a variety of printers, scanners, and fax machines in its two divisions: the PSF Division and the Components Division. The Components Division produces electronic components that can be used by the PSF Division. All the components this division produces can be sold to outside customers. However, from the beginning, nearly all of its output has been used internally. The current policy requires that all internal transfers of components be transferred at full cost.

Recently, Cam DeVonn, the chief executive officer of Lansing Electronics, decided to investigate the transfer pricing policy. He was concerned that the current method of pricing internal transfers might force decisions by divisional managers that would be suboptimal for the firm. As part of his inquiry, he gathered some information concerning Component Y$34,$ which is used by the PSF Division in its production of a basic scanner, Model SC$67.$

The PSF Division sells $40,000$ units of Model SC$67$ each year at a unit price of $$42.$ Given current market conditions, this is the maximum price that the division can charge for Model SC$67.$ The cost of manufacturing the scanner follows:

Line Item Description Cost

Component Y$34$ $ $6\mathrm{.}50$

Direct materials $12\mathrm{.}50$

Direct labor $3\mathrm{.}00$

Variable overhead $1\mathrm{.}00$

Fixed overhead $15\mathrm{.}00$

Total unit cost $$38\mathrm{.}00$

The scanner is produced efficiently, and no further reduction in manufacturing costs is possible.

The manager of the Components Division indicated that she could sell $40,000$ units $($the division's capacity for this part$)$ of Component Y$34$ to outside buyers at $$12$ per unit. The PSF Division could also buy the part for $$12$ from external suppliers. She supplied the following details on the manufacturing cost of the component:

Line Item Description Cost

Direct materials $$2\mathrm{.}50$

Direct labor $0\mathrm{.}50$

Variable overhead $1\mathrm{.}00$

Fixed overhead $2\mathrm{.}50$

Total unit cost $$6\mathrm{.}50$

Required:

$1.$ Compute the firmwide contribution margin associated with Component Y$34$ and Model SC$67.$ Also, compute the contribution margin $5.$ Conceptual Connection: Given your answers to Requirements $3$ and $4,$ compute the firmwide contribution margin. What has happened? Was Cam's decision to grant additional decentralization good or bad?

Firmwide contribution margin: fill in the blank $1$ of $1$$

The contribution margin fill in the blank $1$ of $3$

by fill in the blank $2$ of $3$$$.$ Cam made the fill in the blank $3$ of $3$

decision.