Adler Industries Is a Vertically Integrated Firm with Several Divisions

question 67

Multiple Choice

Adler Industries is a vertically integrated firm with several divisions that operate as decentralized profit centres. Adler's System Division manufactures scientific instruments and uses the products of two of Adler's other divisions. The Board Division manufactures printed circuit boards (PCBs) . One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the systems Division are presented below: $\begin{array}{lrr}&\text { PCB } & \text { Transistor }\\\text { Direct materials } & \$ 2.50 & \$ 0.80 \\\text { Direct labour } & 4.50 & 1.00 \\\text { Variable overhead } & 2.00 & 0.50 \\\text { Fixed overhead } & \underline{0.80} & \underline{0.75} \\\quad \text { Total cost } & \$ 9.80 & \$ 3.05\end{array}$ The Board Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Systems Division would sell for $12.25 per unit on the open market. The market price of the transistor used by the Systems Division is $3.70 per unit.
The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit board. This price will:

• A) Cause the Board Division to reduce the number of commercial printed circuit boards it manufactures
• B) Motivate both divisions as estimated profits are shared
• C) Encourage the Systems Division to seek an outside source for printed circuit boards
• D) Demotivate the Board Division causing mediocre performance

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Definitions:

Discount Date

The last day on which a cash discount may be taken. The day on which a note is discounted (sold).

Due Date

The final day an invoice is to be paid. After that day the buyer may be charged interest. Also, the date by which a loan is to be repaid.

Remittance

Amount that a buyer actually pays after deducting a cash discount.

Discount Period

A certain number of days after the invoice date, during which a buyer may receive a cash discount. The time between a note’s discount date and its maturity date.