Parkside Inc Assume That the Plastics Division Has Excess Capacity and Has

question 136

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 Plastics Division has excess capacity and has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price will likely:

• A) Cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
• B) Motivate both divisions because estimated profits will be shared.
• C) Encourage the Entertainment Division to seek an outside source for plastic components.
• D) Demotivate the Plastics Division, causing mediocre performance.
• E) Motivate the Plastics Division to increase the portion of its manufacturing devoted to the Entertainment Division.

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Definitions:

Repudiate

The rejection or refusal to acknowledge or pay a debt, or the denial of the validity of a contract.

Credit-Reporting Agencies

Organizations that collect, maintain, and provide information about the credit history of individuals and businesses to potential creditors.

Debtors

Individuals or entities that owe money to others.

Contract Voided

Refers to a contract that has been declared invalid and is therefore unenforceable, as if it had never been made.