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:

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, leading to a stable market condition.

Government Implements

Actions taken by the government to put policies, regulations, or laws into effect.

Price Ceiling

A government-imposed limit on how high a price can be charged on a product, intended to protect consumers from high prices.

Consumers

Consumers are individuals or organizations that acquire goods and services for private purposes.