Tyke Corporation has two divisions: Springfield and Chicago. Springfield currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Tyke is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Chicago. Related information about the enhanced system follows:
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs
Required:
A. How would Springfield's divisional manager likely react to the decision to transfer condensers to Chicago? Show computations to support your answer.
B. How would Chicago's divisional management likely react to the $490 transfer price? Show computations to support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Tyke benefit more if it sells the condensers externally or transfers the condensers to Chicago? By how much?

Question

Tyke Corporation has two divisions: Springfield and Chicago. Springfield currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Tyke is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Chicago. Related information about the enhanced system follows:
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs
Required: 
A. How would Springfield's divisional manager likely react to the decision to transfer condensers to Chicago? Show computations to support your answer.
B. How would Chicago's divisional management likely react to the $490 transfer price? Show computations to support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Tyke benefit more if it sells the condensers externally or transfers the condensers to Chicago? By how much?

Quizplus · Accepted Answer

The Answer of Tyke Corporation has two divisions: Springfield and Chicago. Springfield currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Tyke is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Chicago. Related information about the enhanced system follows:
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs
Required: 
A. How would Springfield's divisional manager likely react to the decision to transfer condensers to Chicago? Show computations to support your answer.
B. How would Chicago's divisional management likely react to the $490 transfer price? Show computations to support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Tyke benefit more if it sells the condensers externally or transfers the condensers to Chicago? By how much?

Tyke Corporation Has Two Divisions: Springfield and Chicago