Levis Is a Large Manufacturer of Office Equipment, Including Copiers

question 6

Essay

Levis is a large manufacturer of office equipment, including copiers. Its electronics division is a cost center. Currently, electronics sells circuit boards to other divisions exclusively. Levis has a policy that internal transfers are to be priced at full cost (fixed + variable). Thirty percent of the cost of a board is considered fixed.
The electronics division is operating at 75 percent of capacity. Because there is excess capacity, electronics is seeking opportunities to sell boards to non-Levis firms. The electronics division policy on non-Levis sales states that each job must cover full cost and a minimum 10 percent profit. Electronics division management will be measured on its ability to make the minimum profit on any non-Levis contracts that are accepted.
Copy products is another Levis division. Copy products has recently reached an agreement with Siviy, a non-Levis firm, for the assembly of subsystems for a copier. Copy products has selected Siviy because of Siviy's low labor cost. The subsystem Siviy will assemble requires circuit boards. Copy products has stipulated that Siviy must purchase the circuit boards from the electronics division because of electronics' high quality and dependability.
Electronic products is anxious to accept this new work from copy products because it will increase electronic product's workload by 15 percent.
In negotiating a contract price with Siviy, copy products needs to take into account the cost of the circuit boards from electronics. The financial analyst from copy products assumes that electronics will sell the circuit boards to Siviy at full cost (the same as the internal transfer price). Electronics is considering adding the minimum 10 percent profit margin to their full cost and transferring at that price to Siviy.
Copy products is preparing to negotiate its contract with Siviy. Develop and discuss at least three options that may be used in establishing the transfer price between the electronics division and Siviy. Discuss the advantages and disadvantages of each.

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Definitions:

Probability

The likelihood or chance of an event occurring, ranging from 0 (impossibility) to 1 (certainty).

Given Information

Any data, facts, instructions, or starting points provided as the basis for understanding or making decisions.

P(A / B)

A conditional probability representing the likelihood of event A occurring given that B has occurred.

Complement

The subset of outcomes in the universal set that are not in the specified event, often used in probability.