The Microprocessor Division of Zenith Systems Company Sells a Computer

question 147

Essay

The microprocessor division of Zenith Systems Company sells a computer module to the company's Assembly Division, which puts together the finished product (viz., guidance systems). The Microprocessor Division is currently working at capacity. The computer module costs $10,000 to manufacture, and it can be sold externally to companies for approximately $13,500 per unit.
Required:
1. Use the general transfer pricing rule to compute a transfer price for the computer module.
2. Explain the underlying logic of the general transfer pricing rule discussed in the chapter.

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Definitions:

Monopoly

A market structure characterized by (1) a single seller of a well-defined product for which there are no good substitutes and (2) high barriers to the entry of any other firms into the market for that product.

Vigorous Competition

Vigorous competition refers to a market condition characterized by strong rivalry among firms, aiming to outperform one another in price, quality, and service.

Short Run

In economics, a period during which at least one input or factor of production is fixed, focusing on immediate outcomes.

Output Quantity

Refers to the total amount of goods or services produced by a company or within an economy during a specific time period.