10. 3.63 points alue Problem 15-39 Analyze Transfer Pricing Data (LO 15-2) Elsin

Question

10. 3.63 points alue Problem 15-39 Analyze Transfer Pricing Data (LO 15-2) Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment, Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 90,000 units per year. These units require 3 direct labor-hours each If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 78,000 of these units per year. If Mobile does not obtain 78,000 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile's audio system. The units can be sold to the outside market for $202 each Home estimates that its total costs are $1,080,000 for fixed costs, $14.40 per direct labor-hour, and $7.20 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.

Explanation / Answer

Sales Price If Sold outside                       72 Material Cost                         7 Labour Cost for 3 hours                       43 Contribution PU                       22 No Of Units Sold              90,000 Total Contribution        19,44,000 Sales Price If Sold outside                 72.00                 81.00 Material Cost                   7.20                   7.20 Labour Cost for 3 hours                 43.20                 57.60 Contribution PU                 21.60                 16.20 No Of Units Sold        12,000.00        78,000.00 Total Contribution     2,59,200.00 12,63,600.00 15,22,800.00

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