TI Scientific Products is a vertically integrated firm with several divisions that operate as decentralized profit centers. TIs Systems Division manufactures scientific instruments and uses the products of two of TIs other divisions, as follows:

Transistor Division products are sold in a well-developed competitive market. One model sold in these markets is also used as an input by the Systems Division for one of its products. The market price of the transistor used by the Systems Division is $3.70 per unit.

Board Division manufactures printed circuit boards (PCBs). One model is made exclusively for the Systems Division using proprietary designs; only less-complex models are sold in outside markets. Board Division sells its products in outside markets at full cost + 25% markup, and believes the proprietary board made for Systems Division would sell for $12.25 per unit if there were an outside market.

The costs per unit of the components sold by Transistor and Board to Systems are:

Transistor

Direct materials-- $0.80

Direct labor-- $1.00

Variable overhead-- $0.50

Fixed overhead-- $0.75

Total full cost-- $3.05

Board

Direct materials-- $2.50

Direct labor-- $4.50

Variable overhead-- $2.00

Fixed overhead-- $0.80

Total full cost-- $9.80

Questions about transfers between Transistor and Systems Divisions

1. First assume that Systems and Transistor are operating at full capacity and can sell all they produce to outside customers. What is the minimum transfer price Transistor should be willing to accept from Systems? What is the maximum transfer price Systems should be willing to pay to Transistor?

2. Now assume that Systems can purchase a large quantity of transistors from an outside source at $2.90 per unit, and that Transistor has excess capacity. Can Transistor meet the $2.90 price?

Questions about transfers between Board and Systems Divisions

3. Board and Systems have negotiated a transfer price of $11 per PCB. Why are both division managers happy with this price? What might be the problem with this price? What is a problem with using negotiations in this setting?

Transistor Division Systems Division Board Division