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:

Procedures

Established methods or sequences of actions for performing specific tasks or activities within an organization or process.

Strategies

The plans and actions taken by a business or individual to achieve specific goals and objectives.

Core Values

Fundamental beliefs or principles that guide the behavior and decision-making processes of an individual or organization.

Objectives

Statements of an accomplishment of a task to be achieved, often by a specific time. Also called goals.