Wallen Products Inc. has just purchased a small company that specializes in the
ID: 2332565 • 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: Selling price $20 Variable Fixed (based on a capacity of $11 100,000 tuners per year) 6 17 Operating income S 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 acquired Tuner Division in order to "keep the profits within the 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?Explanation / Answer
1(a) Minimum Transfer Price = Variable Cost + Opportunity Cost
= 11 + 3
= 14
1(b) Maximum Transfer Price = Assembly Division would be ready to pay $ 18 to tuner division which at present they are purchasing from third party.
1(c) Yes, since it would be profitable for the both the unit to work with each other
2(a) Profit of tuner division will decrease by $ 2 per tuner
2(b) Profit of assembly division will remain unchanged.
2(c) Profit of Company as a whole will decrease by $ 2 per tuner
3(a) Variable cost i.e $ 11 would be minimum transfer price.
3(b) Range would $ 11 to $ 17 where both manager should agree for
3 (c) Yes. since it is profitable for Company as a whole as tuner division is not able to sell its entire production outside. so it would be win-win situation for both units and company as a whole.
4(a) Yes, tuner division should not meet the price, since variable cost is only 11 for tuner Division. Fixed cost of 6 is sunk cost hence would not be taken into consideration here.
4(b) if Tuner division sells on 60000 tuner outside then there would be overall loss of $ 60000 ($1200000 (Sales)- $1260000(Fixed Plus Variable cost).
If tuner division will give 30000 tuner @ 16 then there would increase in revenue by 480000 and cost by 330000 hence there would be profit of $ 150000 which tuner division would lose in case price $ 16 is not met by tuner division.
Profit of Company would increase by $ 90,000 ($150000-$60000)
5 Yes, Assembly division should purchase from tuner division at higher price since this would increase the profit of the company as a whole.
6
(a) Tuner division will have increase in profits by $ 270000 (30000 tuner * $ 9 per tuner)
(b) Assembly division will have decrease in profits by $ 120000. (30000 tuner * $ 4 per tuner)
(c) Overall profit of company would increase by $ 150000 ($270000- $ 150000)
(c) Profit of Company as a whole would increase since fixed cost of tuner division i.e. $ 6 would be absorb by assembly division
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