Adler Industries Is a Vertically Integrated Firm with Several Divisions

question 76

Multiple Choice

Adler Industries is a vertically integrated firm with several divisions that operate as decentralized profit centres. Adler's System Division manufactures scientific instruments and uses the products of two of Adler's other divisions. The Board Division manufactures printed circuit boards (PCBs) . One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the systems Division are presented below: PCB Transistor
Direct materials $2.50 $0.80
Direct labour 4.50 1.00
Variable overhead 2.00 0.50
Fixed overhead 0.80 0.75
Total cost $9.80 $3.05
The Board Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Systems Division would sell for $12.25 per unit on the open market. The market price of the transistor used by the Systems Division is $3.70 per unit.
(CMA) A per unit transfer price from the Transistor Division to the Systems Division at full cost, $3.05, would:

• A)Allow evaluation of both divisions on a competitive basis
• B)Satisfy the Transistor Division's profit desire by allowing recovery of opportunity costs
• C)Demotivate the Systems Division and cause mediocre performance
• D)Provide no profit incentive for the Transistor Division to control or reduce costs

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