Tyke Corporation Has Two Divisions: Springfield and Chicago

question 80

Essay

Tyke Corporation has two divisions: Springfield and Chicago. Springfield currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Tyke is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Chicago. Related information about the enhanced system follows:
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs
Required:
A. How would Springfield's divisional manager likely react to the decision to transfer condensers to Chicago? Show computations to support your answer.
B. How would Chicago's divisional management likely react to the $490 transfer price? Show computations to support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Tyke benefit more if it sells the condensers externally or transfers the condensers to Chicago? By how much?

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Definitions:

Single Occupation

A career or job path focused on one particular area of expertise or profession.

Business Unionism

A model of labor relations where the main goal of the union is to secure better wages, hours, and working conditions, often through pragmatic dealings with employers.

Capitalist System

An economic system where private individuals own the means of production and operate for profit.

Fair Share

The principle that all members of a group should equally contribute to, or benefit from, resources or opportunities.