Parkside Inc Assume That the Entertainment Division Is Able to Purchase a Each

question 135

Multiple Choice

Parkside Inc. has three divisions (Entertainment, Plastics, and Video Card) , each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows:

1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division) . In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers.
2. The Entertainment Division purchases, for each unit it produces, a video card from Parkside's Video Card Division, which also sells this video card externally (to other producers) . The per-unit manufacturing costs associated with each of the above two items, as incurred by the Plastic Components Division and the Video Card Division, respectively, are:
$\begin{array}{lrr}&\text { Plastic }\\&\text { Components }&\text { Video Cards }\\\text { Direct material } & \$ 1.25 & \$ 2.40 \\\text { Direct labor } & 2.35 & 3.00 \\\text { Variable overhead } & 1.00 & 1.50 \\\text { Fixed overhead } & 0.40 & 2.25\\\text { Total cost }&\$5.00&\$9.15\end{array}$ Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70/unit. The Video Cards Division, having excess capacity, agrees to lower its transfer price to $8.70/unit. This action would likely:

• A) Optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside Inc.
• B) Allow evaluation of both divisions on the same basis.
• C) Subvert the profit goals of the Video Cards Division while optimizing the profit goals of the Entertainment Division.
• D) Cause mediocre behavior in the Video Cards Division as lost opportunity costs increase.
• E) Optimize the overall profit goals of Parkside Inc.

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Definitions:

1980s

Refers to the decade recognized for significant cultural, political, and technological changes impacting various sectors globally.

Operational Approach

A manner of addressing tasks and problems through practical, action-based strategies focused on the efficient functioning of an organization.

Functional Approach

The functional approach focuses on how specific roles, responsibilities, and tasks within an organization are organized according to different functions or departments to achieve efficiency and effectiveness.

Contingency Approach

A management theory that suggests the best course of action in business or decision-making depends on the specific circumstances or factors present at the time.