Chapter 8, Problem 8.4AP

Word Wizard is a publishing company with a number of different book lines. Each line has contracts with a number of different authors. The company also owns a printing operation called Quick Press. The book lines and the printing operation each operate as a separate profit center. The printing operation earns revenue by printing books by authors under contract with the book lines owned by Word Wizard, as well as authors under contract with other companies. The printing operation bills out at $0.01 per page, and a typical book requires 500 pages of print. A manager from Business Books, one of the Word Wizard’s book lines, has approached the manager of the printing operation offering to pay $0,007 per page for 1.500 copies of a 500-page book. The book line pays outside printers $0,009 per page. The printing operation’s variable cost per page is $0,004.

Instructions

Determine whether the printing should be done internally or externally, and the appropriate transfer price, under each of the following situations.

(a) Assume that the printing operation is booked solid for the next 2 years, and it would have to cancel an obligation with an outside customer in order to meet the needs of the internal division.

(b)  Assume that the printing operation has available capacity.

(c) ________ The top management of Word Wizard believes that the printing operation should always do the printing for the company’s authors. On a number of occasions, it has forced the printing operation to cancel jobs with outside customers in order to meet the needs of its own lines. Discuss the pros and cons of this approach.

(d) Calculate the change in contribution margin to each division, and to the company as a whole, if top management forces the printing operation to accept the $0,007 per page transfer price when it has no available capacity.