Figure 12-8 Bostonian Inc. Has a Number of Divisions, Including Delta Division

question 9

Essay

Figure 12-8
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow Division owns and operates a line of MP3 players. Each year the ListenNow Division purchases component AZ in order to manufacture the MP3 players. Currently it purchases this component from an outside supplier for $6.50 per component. The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ to the ListenNow Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000 component AZs per year; the Delta Division can make up to 60,000 components per year.
-Refer to Figure 12-8. Assume that the company policy is that all transfer prices are negotiated by the divisions involved.
Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. If the transfer takes place, what will be the transfer price?

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Definitions:

Incentives

Rewards or benefits, often linked to performance, that motivate individuals to act in certain ways.

Downsizing

The elimination of a significant number of employees from an organization.