The California Instrument Company (CIC) consists of the Semiconductor Division and the Process-Control Division, each of which operates as an independent profit center. The semiconductor division employs craftsmen who produce two different electronic components: the new high-performance Super-chip and an older product called Okay-chip. These two products have the following cost characteristics:

Joint Research Project Revealed that:
(1) a single Super-Chip could be substituted for the circuit board used to produce the process-control unit
(2) the improved process-control unit could be sold for $145.
1. Calculate the CM per DL hour of selling Super-Chips and Okay-Chips. If no transfers of Super-Chips were made to the process-Control Division, how many Super-Chips and Okay-Chips should the Semiconductor Division manufacture and sell? What would be the division's annual contribution margin?
2. The Process-Control Division expects to sell 5,000 control units this year. From the viewpoint of CIC as a whole, should 5,000 Super-chips be transferred to the Process-Control Division to replace circuit boards?
3. What transfer price, or range of prices, would ensure goal congruence among the division managers?
4. If after the Semiconductor Division has entered into an agreement to sell 15,000 superchips to its outside customers, the Process Control Division contacts the Semiconductor Division to buy 5,000 superior chips and the the Semiconductor Division has been able to relax its DL hour constraint by 15,000 additional hours, what is the relevant transfer price range of negotiation.

Transcribed Image Text:

California Instrument Company Semiconductor Division (Independent Profit Center) Process-Control Division (Independent Profit Center) Process-Control Super-Chip Okay-Ch Direct Materials Direct Mfg. Labor S5 Direct Materials (Circuit Board) Direct Mfg. Labor S2 70 $20 $60 65 Hours Labor rate/hour Total Labor rate/hour $20 115 Total Direct Mfg. Costs Capacity in Direct Labor Hrs. Total Direct Mfg. Costs 45,000 Sales: Process-Control Unit Super-Chip Customer Maximum Demand@ $80 Selling Price 15,000 $80 Quantity Selling Price 1 $132 Okay-Chip Customers Maximum Demand@ $26 Selling Price $26