The Microchip Division of Silicon Computers Produces Computer Chips That

question 28

Essay

The Microchip Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders.Operating data for the Microchip Division for 20X5 are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Internal Sales } & \text { External Sales } \\\hline \text { Sales: } & & \\\hline 300,000 \text { chips at } \$ 10 & \$ 3,000,000 & \\\hline 200,000 \text { chips at } \$ 12 & & \$ 2,400,000 \\\hline \text { Variable expenses at } \$ 4 & 1,200,000 & \underline { 800,000 } \\\hline \text { Contribution margin } & \$ 1,800,000 & \$ 1,600,000 \\\hline \text { Fixed cost (allocated in units) } & 1,500,000 & 1,000,000 \\\hline \text { Operating income } & \$ 300,000 & \$ 600,000 \\\hline\end{array}$$ The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.90 each.The manager of Microchip Division is not willing to meet the $8.90 price.She argues that it costs her $9.00 to produce and sell each chip.Sales to outside customers are at a maximum of 200,000 chips.
Required:
a.Verify the Microchip Division's $9.00 unit cost figure.
b.Should the Microchip Division meet the outside price of $8.90? Explain.
c.Could the $8.60 price be met and still show a profit for the Microchip Division sales to the Personal Computer Division? Show computations.

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Definitions:

Variable Costs

Expenses that vary directly with the amount of production or the degree of business operations.

Fixed Costs

Expenses that do not change with the level of production or sales over a certain period, such as rent or salaries.

Target Net Income

The income objective set by management.

Required Sales

The amount of sales a company needs to achieve in order to cover all its costs and reach its break-even point.