You are the divisional controller of the U.S. division of Samtech Electronics. Your division is operating at capacity. The Australian division has asked the U.S. division to supply a sound system (chip and speaker), which it will use in a new model Game Box that it is introducing. The U.S. division currently sells identical sound systems to outside customers at $11.00 each.

The Australian division has offered to pay $7.00 for each sound system. The total cost of the Game Box is as follows:

• Purchased parts from outside vendors $28.10
• Sound systems from US division $7.00
• Other variable costs $17.50
• Fixed Overhead $10.00
• Total $62.60

The Australian division is operating at 50% of capacity, and this Game Box is an important new product introduction to increase its use of capacity. Base on the target-costing approach, the Australian division management has decided that paying more than $7.00 for the sound system would make production of the Game Box infeasible because the predicted selling price for the Game Box is only $62.00.

Samteach Electronics evaluates divisional managers on the basis of pretax ROI and dollar profits compared to the budget. Ignore taxes and tariffs.

1. As divisional controller of the US division, would you recommend supplying the sound system to the Australian division for $7.00 each? Why or why not?
2. Would it be to the short-run economic advantage of Samtech Electronics for the US division to supply the sound system to the Australian division? Explain.
3. Discuss the organizational and behaviorial difficulties, if any, inherent in this situation. As the US division controller, what would you advise the Samtech Electronics president to do in this situation?