Giga-Stuff, Inc Sophistosand Has the Capacity to Make 400,000 Units of Component

question 71

Multiple Choice

Giga-Stuff, Inc.Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X: $$\begin{array} { l l } \text { Direct materials } & \$ 0.30 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.70 \\\text { Fixed overhead } & \underline { 1.00 } \\\text { Total } & \underline { \$ 2.15 }\end{array}$$ Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives) .
-Refer to Giga-Stuff, Inc. Assume the company allows negotiated transfer pricing. What is the ceiling of the bargaining range, and which division sets it?

• A) $2.15; Videostuff
• B) $2.50; Videostuff
• C) $2.15; Sophistosand
• D) $2.50; Sophistosand

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Definitions:

Probability Outcomes

The set of possible results in an experiment or situation, often quantified as likelihoods or percentages.

Decision Tree Analysis

A graphical representation of possible solutions to a decision based on different conditions, often used in business to strategize investments or processes.

NPV

Net Present Value (NPV) is a financial metric that calculates the present value of all future cash flows associated with an investment, minus the initial investment cost.

Risk

Exposure to the chance of loss or damage, often evaluated in financial terms for its potential impact on investment returns.