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.
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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
What transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations.
Transcribed Image Text: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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education