Smartwork Computer manufactures scanners in its two divisions: the ASSEMBLY Division and the COMPONENT Division. The COM

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Smartwork Computer manufactures scanners in its two divisions:
the ASSEMBLY Division and the COMPONENT Division. The COMPONENT
Division produces circuit board that can be used by the ASSEMBLY
Division. All the circuit boards this division produces can be sold
to outside customers. However, from the beginning, nearly 90% of
its output has been used internally. The COMPONENT Division
transfers 35,000 circuit boards to Assembly Division at market
price.
The manager of the COMPONENT Division can sell 40 000 units (the
division’s capacity for this part) of Circuit board to outside
buyers at $225 per unit. The ASSEMBLY Division could also buy the
part for $225 from external suppliers. Component Division operates
efficiently, and the following are details on the manufacturing
cost of a circuit board:
Direct materials
$75.0
Direct labour
25.0
Variable overhead
15.0
Fixed overhead
10.0
Total unit cost
$125.0
The ASSEMBLY Division produces and sells 35 000 units of Model
MO205 each year at a unit price of $670. The normal capacity of
Assembly Division is 45 000 units. For this Given current market
conditions, this is the maximum price that the division can charge
for Model MO205.
Recently, foreign competitors reducing their prices to $ 550. To
match the latest market competition, Assembly Division would reduce
the price from $670 to $ 550. This would put the price below the
cost to produce and sell it. Bob Samarata, the general manager of
this company got confused….. how could these firms sell for such a
low price? To improve the profit of the Company as a whole and
ASSEMBLY Division, the CEO of this company asked COMPONENT Division
to transfer the circuit to ASSEMBLY Division for $180. The manager
of COMPONENT Division was not happy with this new policy.
Bob, has asked you to form a team to work on the cost analysis
and provide a recommendation, how the transfer price should be
applied fairly between two divisions and how the Assembly
department could match with the competitor’s price.
Below is some information related to MO205. The variable cost of
manufacturing 35,000 units of scanner as follows:
Setting up equipment
$ 1,250, 000
Materials handling
1,800, 000
Inspecting products
1,220, 000
Engineering support
1,200, 000
Handling customer complaints
700, 000
Filling warranties
570, 000
Storing goods
600,000
Expediting goods
1,000,000
Circuit board
9,000,000
Using other materials
500, 000
Using power
480, 000
Manual insertion laboura
2,500, 000
Other direct labour
1,500, 000
The total Fixed cost (based on normal capacity) is $ 2,000,000
per year.
REQUIRED:
1. Compute the total contribution margin earned by each
division
2. Compute the firm-wide total profit associated with Component
and Model MO205
3. Given the new transfer pricing policy, predict how this will
affect the total contribution margin of the Component and Assembly
Division manager for Model MO205
4. Given your answers to requirements 1,2,3 compute the
firm-wide profit. Give your comment, what has happened? Was CEO’s
decision to apply a new transfer pricing policy fair to both
divisions? Explain
5. Do you have any suggestions on how to improve the performance
of Assembly Division? What are recommended program(s) should be
planned, explain the rationale of your program(s) and proof your
recommendation with calculations.
6. Based on your balance scorecard knowledge, provide a
suggestion what are the best performance measures for both
divisions? Draw a strategy map to show the linkages of the
suggested performance measures