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
The process-control division expects to sell 1,250 process-control units this year. From the viewpoint of Sierra Inc. as a whole, should 1,250 Xcel-chips be transferred to the process-control division to replace circuit boards? Show your computations.
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.
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