The Alpha Division of the Carlson Company manufactures product X at a variable c
ID: 1948732 • Letter: T
Question
The Alpha Division of the Carlson Company manufactures product X at a variable cost of $40 per unit. Alpha Division's fixed costs, which are sunk, are $20 per unit. The market price of X is $70 per unit. Beta Division of Carlson Company uses product X to make Y. The variable costs to convert X to Y are $20 per unit and the fixed costs, which are sunk, are $10 per unit. The product Y sells for $80 per unit.Required:
a. What transfer price of X causes divisional managers to make decentralized decisions that maximize Carlson Company's profit if each division is treated as a profit center?
b. Given the transfer price from part (a), what should the manager of the Beta
Division do?
c. Suppose there is no market price for product X. What transfer price should be
used for decentralized decision-making?
d. If there is no market for product X, is the operations of the Beta Division
profitable?
Explanation / Answer
Davisco Foods is a family-owned company, mainly concerned with dairy products, which is headquartered in Le Sueur, Minnesota. The company markets such brands as BiPRO and BioZate. They also own Cambria, the sole producer of quartz work surfaces in the U.S Davisco Foods International, Inc. is a cheese and food ingredient company based in Le Sueur, Minnesota, USA. It began in 1943 when founder Stanley Davis purchased the St. Peter Creamery of St. Peter, Minnesota. The company has since expanded to include plants in Minnesota, Idaho, and South Dakota, as well as sales offices in Mexico, Switzerland and the United States. Davisco Foods International is currently managed by Stanley’s son, company president Mark Davis, and his four sons, Marty, Mitch, Matt, and Jon
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