Multiple Choice Allow evaluation of both divisions on a competitive basis. Demotivate the Entertainment Division and cause mediocre performance. Satisfy the Video Cards Division profit desire by allowing recovery of opportunity costs. Provide no profit incentive for the Video Cards Division to control or reduce costs. Encourage the Entertainment Division to purchase video cards from an outside source.
Code Incorporated has three divisions (Entertainment, Plastics, and Video Card), each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows:
1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division). In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers.
2. The Entertainment Division purchases, for each unit it produces, a video card from Code's Video Card Division, which also sells this video card externally (to other producers). The per-unit
| Plastic Components | Video Cards | |
|---|---|---|
| Direct material | $ 1.25 | $ 2.40 |
| Direct labor | 2.35 | 3.00 |
| Variable |
1.00 | 1.50 |
| Fixed overhead | 0.40 | 2.25 |
| Total cost | $ 5.00 | $ 9.15 |
The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market. The market price of the video card used by the Entertainment Division is $10.98 per unit. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would:
-
Allow evaluation of both divisions on a competitive basis.
-
Demotivate the Entertainment Division and cause mediocre performance.
-
Satisfy the Video Cards Division profit desire by allowing recovery of opportunity costs.
-
Provide no profit incentive for the Video Cards Division to control or reduce costs.
-
Encourage the Entertainment Division to purchase video cards from an outside source.
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