Wallen Products Inc. has just purchased a small company that specializes in the
ID: 2574150 • Letter: W
Question
Wallen Products Inc. has just purchased a small company that specializes in the manufacture of electronic tuners that are used as a component part of LCD TVs. Wallen Products is a decentralized company, and it will treat the newly acquired company as an autonomous division with full profit responsibility. The new division, called the Tuner Division, has the following revenue and costs associated with each tuner that it manufactures and sells:
(for question2, 4-b and 6, please write increase, decrease or unchanged in the first column)
5. Wallen Products Inc. has just purchased a small company that specializes in the manufacture of electronic tuners that are used as a component part of LCD TVs. Wallen Products is a decentralized company, and it will treat the newly acquired company as an autonomous division with full profit responsibility. The new division, called the Tuner Division, has the following revenue and costs associated with each tuner that it manufactures and sells $20 Selling price Expenses Variable Fixed (based on a capacity of 100,000 tuners per year) 6 17 income $ 3 Wallen Products also has an Assembly Division that assembles TVs. This division is currently purchasing 30,000 tuners per year from an overseas supplier at a cost of$20 per tuner, less a 10% purchase discount. The president of Wallen Products is anxious to have the Assembly Division begin purchasing its tuners from the newly acquiredTuner Division in order to "keep the profits within the corporate family. Required: For (1) and (2) below, assume that the Tuner Division can sell all of its output to outside TV manufacturers at the normal $20 price 1-a. What is the minimum transfer price for Tuner Division? inimum transfer 1-b. What is the maximum transfer price that Assembly Division is ready to pay? aximum transfer price 1-c. Are the managers of the Tuner and Assembly Divisions likely to voluntarily agree to a transfer price for 30,000 tuners each year? No 2· lf the Tuner Division meets the price that the Assembly Division is currently paying to its overseas supplier and sells 30,000 tuners to the Assembly Division each year, what will be the effect on the profits of the Tuner Division, the Assembly Division, and the company as a whole? a. The Tuner Division will have a(n) b. The Assembly Division will have a(n) c. The company as a whole will have a(n) "(in profit by anft by by decrease increase remains unchangedExplanation / Answer
1-a. Minimum transfer price $20 Since the Tuner division can sell all its outfut to outside TV manufacturers at $20 Any quantity to Assembly Division has to be diverted at loss of profit Any price less than $20 will reduce the contribution margin and censequently Profit will be reduce. Hence minimum Transfer price acceptable is $20 1-b Maximum Transfer Price that assembly division is ready to pay $18 ($20-discount)=$20-(0.1*20)=$18 Assembly division is currently spending $ 18 per piece Any price higher than $18 would mean reduction of income for assembly division 1-c NO,Tuner and assembly division are not likely to agree to a transfer price. 2 a The Tuner division will have a decrease in profit by $60,000 b The assembly division will have unchanged in profit by $0 c The company as a whole will have a decrese in profit by $60,000 3-a. Minimum transfer price $11 Contribution margin=Sales Price minus variable cost=(20-11)=$9 Since only 60% of capacity is utilized any extra sell till full capacity at sales price higher than $11 will give the Tuner division extra income. Fixed cost will not increase , since the plant is working at less than full capacity,Minum transfer price=$11 3-b The transfer price can be a lowest of $11 and highest of $18 3-c YES,Tuner and assembly division are likely to agree to a transfer price. 4-a YES, Tuner division should meet the price of $16 Since the variable cost is $11and there is idle capacity, price of $16 will give the division additional income of $(16-11)=$5 per unit Total additional income will be(30000*5)= $150,000 4-b Profit of the company will decrease by $150,000 5 Yes, If Assembly division buys from Tuner division at higher price the income of the company as a whole will increase Assuming the transfer price determined=$17 Assembly divisions profit will decrease by $30,000 Tuner division profit will increase by(17-11)*30000 $180,000 Net increase of income of the company $150,000 6 a The Tuner division will have an increase in profit by $270,000 b The assembly division will have a decrease in profit by $120,000 c The company as a whole will have a decrese in profit by $150,000
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