VisBright manufactures and sells televisions. The company's upstream division, Chip Division, builds

chips that are placed behind screens to control the image displayed. Chip Division sells chips to

VisBright's downstream division, Screen Division, at a transfer price that the two divisions negotiate.

Screen Division can also buy chips on the external market for $$30$ per chip. Screen Division produces

screens and connects a single chip to each screen in order to produce a completed television.

Chip Division's costs per chip are as follows:

Direct Materials of $$8$

Direct Labour of $$5$

Variable Overhead of $$7$

Screen Division's costs per screen are as follows:

Direct Materials of $$11$

Direct Labour of $$2$

Variable Overhead of $$5$

The fixed costs of Chip Division are $$400,000$ and the fixed costs of Screen Division are $$2,000,000.$

Capacity at those fixed costs are $200,000$ chips and $200,000$ screens.

REQUIRED:

Question $1-$A: If the transfer price of a chip is negotiated to be $140\%$ of variable costs, and if Chip

Division sells $100,000$ chips to Screen Division, what is Chip Division's operating income?

$[6$ marks$]$

Question $1-$B: If Screen Division obtains all of its chips from Chip Division and sells $100,000$

televisions to retailers at a market price of $$80,$ what is the operating income of VisBright?

$[6$ marks$]$

Question $1-$C: If Chip Division has excess capacity to produce $100,000$ chips which it cannot sell

externally, must it be willing to sell to Screen Division for a transfer price below $$30$ per chip?

Explain.

$[3$ marks$]$

Question $1-$D: If the transfer price of a chip is negotiated to be $140\%$ of full costs, and if the market

price of a television falls to $$45$ before Vis$-$Bright reaches its capacity level of production, should

VisBright use any excess capacity to sell televisions? Would Screen Division want to continue to sell

televisions in this scenario?

$[5$ marks$]$

Question $1-$E: Calculate and compare the difference in overall corporate operating income between

Scenario A and Scenario B if the Screen Division sells $100,000$ televisions to retailers for $$80$ per

television.

Scenario A: Negotiated transfer price of $$21$ per chip.

Scenario B: Market$-$based transfer price of $$30$ per chip.