Parkside Inc The Plastics Division Sells Its Commercial Products at Full Cost

question 47

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:
$\begin{array}{lrr}&\text { Plastic }\\&\text { Components }&\text { Video Cards }\\\text { Direct material } & \$ 1.25 & \$ 2.40 \\\text { Direct labor } & 2.35 & 3.00 \\\text { Variable overhead } & 1.00 & 1.50 \\\text { Fixed overhead } & 0.40 & 2.25\\\text { Total cost }&\$5.00&\$9.15\end{array}$
The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25/unit on the open market. The market price of the video card used by the Entertainment Division is $10.98/unit. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would:

• A) Allow evaluation of both divisions on a competitive basis.
• B) Satisfy the Video Cards Division profit desire by allowing recovery of opportunity costs.
• C) Demotivate the Entertainment Division and cause mediocre performance.
• D) Provide no profit incentive for the Video Cards Division to control or reduce costs.
• E) Encourage the Entertainment Division to purchase video cards from an outside source.

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