Kendall Corporation Has Two Divisions: Calgary and Regina

question 62

Essay

Kendall Corporation has two divisions: Calgary and Regina. Calgary currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace.
Kendall is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Regina. Related information about the enhanced system follows.
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs required: $820
Transfer price of condenser: $490
Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management.
Required:
A. How would Calgary's divisional manager likely react to the decision to transfer condensers to Regina? Show computations to support your answer.
B. How would Regina's divisional management likely react to the $490 transfer price? Show computations to support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Kendall benefit more if it sells the condensers externally or transfers the condensers to Regina? By how much?

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Definitions:

Motivation

The internal or external drive that prompts individuals towards actions, goals, or to fulfill certain needs.

Free Will

The ability of individuals to make choices that are not predetermined by past events or natural laws.

Determinism

The philosophical doctrine that all events, including moral choices, are determined completely by previously existing causes.

Personal-Document Approach

A method of studying personality that involves analysis of personal documents like diaries, letters, and autobiographies to understand individual lives and psychological patterns.