XYZ Inc. (XYZ) is involved in the manufacturing and sales of small electrical items. It has three segments: Corporate, SME (small and medium enterprises), and Retail. The segments largely function as decentralized autonomous units. The segments are primarily evaluated on the basis of 'profit before tax'.

The SME segment annually purchases from the Corporate segment 10,000 units of "low voltage circuit breakers (LVCB)", which the Corporate segment also produces for use in manufacturing one of its own products. The SME segment wants to increase its purchases of LVCB to 15,000 units per year.

The problem is that the Corporate segment is at full capacity: satisfying its own demand for LVCB, selling 10,000 units of LVCB to the SME segment, and selling another 9,000 units of LVCB to the external market. Corporate segment estimates that it could easily sell 19,000 units in the external market.

On one hand, internal transfers from the Corporate segment to SME segment do not incur any variable packaging costs on the transfers. On the other hand, the Corporate segment can sell the units to outside parties at a price greater than the current transfer price charged to SME.

SME can buy a unit that is equivalent to LVCB from two external suppliers: ATronics or B Electricals. ATronics is also a customer of the Corporate segment and now purchases 650 units of 'medium voltage circuit breakers (MVCB)' from the Corporate segment. B Electricals is not a customer of the Corporate segment.

Questions:

For the following, assume that segments can now negotiate the transfer price of LVCB and are free to make their own decisions about buying and selling internally or externally.

a) Assume the Corporate segment's sales of MVCB to ATronics would not be affected by the SME segment's decision about LVCB. What is the minimum transfer price that the Corporate segment would accept if the SME segment buys from the Corporate segment? What is the maximum transfer price that the SME segment would accept? From whom (Corporate segment, B Electricals, or ATronics) would XYZ prefer that SME segment buy its additional 5,000 units of LVCB? Show all relevant calculations. Explain.

b) Assume the Corporate segment's sales of MVCB to ATronics will be canceled if the SME segment does not buy 5,000 units from ATronics. How do your answers to the questions in (a) change as a result of this different assumption?

c) Revert back to the original assumption, that the Corporate segment's sales of MVCB to ATronics would not be affected by the SME segment's decision about LVCB. What is the maximum amount that the Corporate segment would be willing to pay to rent on an annual basis a piece of equipment that will increase the production capacity of LVCB by 2,000 units? Assume other variable costs per unit remain the same.

d) What additional factor(s) would you consider if the Corporate segment was located in the United States while the SME segment was based in Singapore?

Corporate Segment: Data on LVCB: Current transfer price to SME Variable manufacturing costs (excluding packaging) Variable packaging costs Sales Price to outside buyers Data on MVCB: Variable manufacturing costs (excluding packaging) Variable packaging costs Sales price $185 147 8 205 $59 6 95 Other external suppliers of equivalent LVCB units: B Electricals, price A Tronics, price $200 210 Corporate Segment: Data on LVCB: Current transfer price to SME Variable manufacturing costs (excluding packaging) Variable packaging costs Sales Price to outside buyers Data on MVCB: Variable manufacturing costs (excluding packaging) Variable packaging costs Sales price $185 147 8 205 $59 6 95 Other external suppliers of equivalent LVCB units: B Electricals, price A Tronics, price $200 210