Transfer pricing, utilization of capacity. (J. Patell, adapted) Sierra Inc. consists of a semiconduc- tor division and a process-control division, each of which operates as an independent profit center. The semiconductor division employs craftsmen who produce two different electronic components: the new high- performance Xcel-chip and an older product called the Dcel-chip. These products have the following cost characteristics: Xcel-chip $ 10 Dcel-chip $8 Direct materials Direct manufacturing labor: 4 hours x $25; 2 hours x $25 100 50 Due to the high skill level necessary for the craftsmen, the semiconductor division's capacity is set at 55,000 hours per year. Maximum demand for the Xcel-chip is 13,750 units annually, at a price of $130 per chip. There is unlim- ited demand for the Dcel-chip at $65 per chip. The process-control division produces only one product, a process-control unit, with the following cost structure: - Direct materials (circuit board): $80 - Direct manufacturing labor (3.5 hours x $10): $35 The current market price for the control unit is $125 per unit. A joint research project has just revealed that a single Xcel-chip could be substituted for the circuit board currently used to make the process-control unit. The direct manufacturing labor cost of the process- control unit would be unchanged. The improved process-control unit could be sold for $185.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Calculate the contribution margin per direct-labor hour of selling Xcel-chip and Dcel-chip. If no transfers of Xcel-chip are made to the process-control division, how many Xcel-chips and Dcel-chips should the semiconductor division manufacture and sell? What would be the division’s annual contribution margin? Show your computations.

Transfer pricing, utilization of capacity. (J. Patell, adapted) Sierra Inc. consists of a semiconduc-
tor division and a process-control division, each of which operates as an independent profit center. The
semiconductor division employs craftsmen who produce two different electronic components: the new high-
performance Xcel-chip and an older product called the Dcel-chip. These products have the following cost
characteristics:
Xcel-chip
$ 10
Dcel-chip
$8
Direct materials
Direct manufacturing labor:
4 hours x $25; 2 hours x $25
100
50
Due to the high skill level necessary for the craftsmen, the semiconductor division's capacity is set at 55,000
hours per year.
Maximum demand for the Xcel-chip is 13,750 units annually, at a price of $130 per chip. There is unlim-
ited demand for the Dcel-chip at $65 per chip.
The process-control division produces only one product, a process-control unit, with the following cost
structure:
- Direct materials (circuit board): $80
- Direct manufacturing labor (3.5 hours x $10): $35
The current market price for the control unit is $125 per unit.
A joint research project has just revealed that a single Xcel-chip could be substituted for the circuit
board currently used to make the process-control unit. The direct manufacturing labor cost of the process-
control unit would be unchanged. The improved process-control unit could be sold for $185.

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