Galati Products, Inc., has just purchased a small company that specializes in th

Question

Galati Products, Inc., has just purchased a small company that specializes in the manufacture of electronic tuners that are used as a component part of TV sets. Galati Products, Inc., 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 Expenses: Variable $20 $11 Fixed (based on a capacity of 100,000 tuners per year) 6 17 Net operating income S3 Galati Products also has an Assembly Division that assembles TV sets. 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 Galati Products is anxious to have the Assembly Division begin purchasing its tuners from the newly acquired Tuner Dvion in order to "keep the profits within the corporate family."

Explanation / Answer

Effects on the profits of the tuner division Total Selling price will be 18 540000 Loss (20-18)*30000 = $ 60000 Profits of tuner division will decrease by $ 60000 Profits of the company as a whole will decrease by $ 60000 If tuner division is currently selling only 60000 units The minimum transfer price will be the variable cost i.e. $ 11 per unit 3b Lowest is $ 11 and highest is $ 18 5 Yes the assembly shall purchase till the price of $ 18 for the good of the company as a whole

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