Sonoma Corporation Is a Multi-Divisional Company Whose Managers Have Been

question 79

Essay

Sonoma Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and complete autonomy to accept or reject transfers from other divisions. Division X produces 2,000 units of a subassembly that has a ready market. One of these subassemblies is currently used by Division Y for each final product manufactured, the latter of which is sold to outsiders for $1,600. Y's sales during the current period amounted to 2,000 completed units. Division X charges Division Y the $1,100 market price for the subassembly; Division Y has additional variable costs of $600 per unit. Variable costs for Division X are $850 per unit.
The manager of Division Y feels that X should transfer the subassembly at a lower price because Y is currently unable to make a profit.
Required:
A. Calculate the contribution margins (total dollars and per unit) of Divisions X and Y, as well as the company as a whole, if transfers are made at market price.
B. Assume that conditions have changed and X can sell only 1,000 units in the market at $900 per unit. From the company's perspective, should X transfer all 2,000 units to Y or sell 1,000 in the market and transfer the remainder? Note: Y's sales would decrease to 1,000 units if the latter alternative is pursued.

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Definitions:

Belief in a Just World

The assumption that actions always yield fair and just consequences, wherein good deeds are rewarded and bad deeds are punished.

Equity

The concept or principle of fairness or justice in the way people are treated and opportunities are distributed.

Equality

The state of being equal, especially in status, rights, and opportunities.

Compromise

A method of resolving a disagreement where each party gives up something that was originally wanted to reach a mutually acceptable solution.