Assume the Following Facts Regarding a Product That Division P

question 107

Essay

Assume the following facts regarding a product that Division P can sell internally (to Division B) or externally on the open market. Incremental (i.e., out-of-pocket) cost to Division P for each unit produced = $12. External purchase price, to be paid by Division B = $13.50. Total units needed (annually) by Division B = 1,000.
Required:
1. Assume that there are no alternative uses for Division P's facilities. Determine whether the company as a whole will benefit if Division B purchases the product externally. At what amount should the transfer price be set such that each divisional manager, acting in the best interest of his or her own division, take actions that are in the best interest of the company as a whole?
2. Assume that Division P's facilities would not otherwise be idle if it didn't produce the product for Division B. By not producing the product for Division B, the freed-up facilities would be used to generate a net cash benefit of $1,800. Should Division B purchase from suppliers? (Show calculations.)
3. Assume that for the foreseeable future there are no alternative uses for Division P's facilities, and that the outside supplier's cost to Division B drops by $2. Under this circumstance, should Division B purchase externally? At what amount should the transfer price be set such that each divisional manager, acting in the best interest of his or her division, would take actions that are in the best interest of the company as a whole?

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Definitions:

Horns Error

A type of cognitive bias in which a person's negative traits influence one's perception of their overall character or abilities, leading to an unduly harsh evaluation.

Rating Error

A mistake or bias that occurs when evaluating an individual, typically in performance appraisals, leading to inaccurate or unfair assessments.

Calibration Meetings

Sessions in which managers or HR professionals discuss and align on performance standards, ratings, and development needs for employees to ensure consistency and fairness.

Performance Appraisal

The evaluation process by which an employee's job performance is assessed and documented by a manager or supervisor.