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:

Variable Costs

Costs that vary directly with the level of production or business activity, such as materials and labor.

Fixed Costs

Costs that do not change with the level of production or sales, such as rent, salaries, and insurance.

Break-Even Point

The point at which total costs and total revenue are equal, meaning no net loss or gain, and one has "broken even."

Capacity Strategies

Approaches adopted by businesses to match their operational capacity with demand levels in order to maximize efficiency and customer satisfaction.