Moravian College Operations And Supply Chain Management Assignment Help - Lansing Electronics

Question - Lansing Electronics Inc. manufactures a variety of printers, scanners, and fax machines in its two
divisions: the PSF Division and the Components Division. The Components Division produces
electronic components that can be used by the PSF Division. All the components this division
produces can be sold to outside customers; however, from the beginning, nearly 90 percent of its
output has been used internally. The current policy requires that all internal transfers of components
be transferred at full cost. Recently, Cam DeVonn, the chief executive officer of Lansing Electronics,
decided to investigate the transfer pricing policy. He was concerned that the current method of pricing
internal transfers might force decisions by divisional ...Read More managers that would be suboptimal for the firm.
As part of his inquiry, he gathered some information concerning Component Y34, which is used by
the PSF Division in its production of a basic scanner, Model SC67. The PSF Division sells 40,000
units of Model SC67 each year at a unit price of $42. Given current market conditions, this is the
maximum price that the division can charge for Model SC67. The cost of manufacturing the scanner
follows:
Component Y34 …………. $ 6.50
Direct materials ………….. 12.50
Direct labor ………………. 3.00
Variable overhead ……….. 1.00
Fixed overhead …………… 15.00
Total unit cost …………….$38.00
The scanner is produced efficiently, and no further reduction in manufacturing costs is possible. The
manager of the Components Division indicated that she could sell 40,000 units (the division’s capacity
for this part) of Component Y34 to outside buyers at $12 per unit. The PSF Division could also buy
the part for $12 from external suppliers. She supplied the following details on the manufacturing cost
of the component:
Direct materials …………….$2.50
Direct labor ………………… 0.50
Variable overhead ………….. 1.00
Fixed overhead …………….. 2.50
Total unit cost ………………$6.50

Required:
1. Compute the firmwide contribution margin associated with Component Y34 and Model SC67. Also,
compute the contribution margin earned by each division.
2. Suppose that Cam DeVonn abolishes the current transfer pricing policy and gives divisions
autonomy in setting transfer prices. Can you predict what transfer price the manager of the
Components Division will set? What should be the minimum transfer price for this part? The maximum
transfer price?
3. Given the new transfer pricing policy, predict how this will affect the production decision of the PSF
Division manager for Model SC67. How many units of Component Y34 will the manager of the PSF
Division purchase, either internally or externally?
4. Given the new transfer price set by the Components Division and your answer to Requirement 3,
how many units of Y34 will be sold externally?
5. Given your answers to Requirements 3 and 4, compute the firmwide contribution margin. W hat has
happened? Was Cam’s decision to grant additional decentralization good or bad? ...Read Less

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