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 $20
Expenses:
Variable $10
Fixed (based on a capacity of
98,000 tuners per year) 6 16
Net operating income $4
Galati Products also has an Assembly Division that assembles TV sets. This division is currently purchasing 29,000 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 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 $20 price.
1a. What is the minimum transfer price for Tuner Division? (Omit the “$” sign in your response.)
Minimum transfer price $
1b.
What is the maximum transfer price that Assembly Division is ready to pay? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Maximum transfer price $
1c.
Are the managers of the Tuner and Assembly Divisions likely to voluntarily agree to a transfer price for 29,000 tuners each year?
Yes
No
2.
If the Tuner Division meets the price that the Assembly Division is currently paying to its overseas supplier and sells 29,000 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? (Input all amounts as positive values. Leave no cells blank – be certain to enter “0” wherever required. Do not round intermediate calculations. Omit the “$” sign in your response.)
a. Profits of the Tuner Division will(decrease? increase? unchanged) by $ .
b. Profits of the Assembly Division will(decrease? increase? unchanged) by $ .
c. Profits of the company as a whole will(decrease? increase? unchanged) by $ .
For (3) through (6), assume that the Tuner Division is currently selling only 59,000 tuners each year to outside TV manufacturers at the stated $20 price.
3a.
What is the minimum transfer price for Tuner Division? (Omit the “$” sign in your response.)
Minimum transfer price $
3b.
What is the range of transfer price the manager’s of both divisions should agree? (Round your answers to 2 decimal places. Omit the “$” sign in your response.)
The transfer price can be a lowest of $ and a highest of $ .
3c.
Are the managers of the Assembly and Tuner Divisions likely to voluntarily agree to a transfer price for 29,000 tuners each year?
Yes
No
4a.
Suppose that the Assembly Division’s overseas supplier drops its price (net of the purchase discount) to only $15 per tuner. Should the Tuner Division meet this price?
No
Yes
4b.
How much potential profit will the Tuner Division lose if the $15 price is not met? (Input all amounts as positive values. Omit the “$” sign in your response.)
Profit of the company will(increase? decrease?) by $
5.
Refer to (4) above. If the Tuner Division refuses to meet the $15 price, should the Assembly Division be required to purchase from the Tuner Division at a higher price for the good of the company as a whole?
No
Yes
6.
Refer to (4) above. Assume that due to inflexible management policies, the Assembly Division is required to purchase 29,000 tuners each year from the Tuner Division at $20 per tuner. What will be the effect on the profits of the company as a whole? (Input all amounts as positive values. Omit the “$” sign in your response.)
a. The Tuner Division will have an(increase? decrease?) in profit by $ .
b. The Assembly Division will have a(increase? decrease?) in profit by $ .
c. The company as a whole will have an(increase? decrease?) in profit by $ .