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Adler Industries Is a Vertically Integrated Firm with Several Divisions

question 33

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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) The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit board. This price will:

Definitions:

Cost Method

An accounting method where investments are recorded at their acquisition cost, adjusting for any additional costs or impairments.

Market Value

The prevailing market price for acquiring or disposing of an asset or service.

Par Value

The nominal or face value of a bond, share of stock, or coupon as stated by the issuer, which may not reflect the market value.

Net Loss

The amount by which total expenses exceed total revenues for a business, indicating a negative financial performance for a specific period.