Norex Corporation is a manufacturer of electronic equipment. The large, diversified organization is decentralized and has a number of different divisions. The components division makes electronic components that can be sold either internally to the equipment division or sold to outside customers. Currently, the components division is producing a tiny motor that is often used to run fans to cool equipment. The variable cost of making the motors is $15 per unit, the fixed cost is $5, and the market price is $28. Production is 100,000 units.
The equipment division uses the motor when assembling small fans that are sold to computer manufacturers. Currently, the equipment division sells 50,000 fans. The additional variable cost for processing the motors into fans is $8 per unit. Top management is re-evaluating Norex' transfer pricing policies. The managers are considering the following price options: variable cost, fully allocated cost, and market price.
a)Assume the components division has enough capacity to meet both internal and external demand. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate? Explain your reasoning.
b)Assume the components division is operating at full capacity and could sell more units to the outside market. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate? Explain your reasoning.
c)Now assume the selling price for fans is $40 per unit, the transfer price is set at variable cost, and the components division could sell all of the units it produces externally.
1. What is the contribution margin for Norex if the motors are sold externally? What is the contribution margin for the components division if the motors are sold externally?
2. What is the contribution margin for Norex if the motors are sold internally? What is the contribution margin for the components division if the motors are sold internally?
3. Would the managers of the components division be willing to sell any units to the equipment division? Explain.
4. Calculate the opportunity cost of selling all of the motors externally.
5. Recommend a transfer price policy to Norex that could potentially solve any problems of suboptimal decision-making.

Question

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The Answer of Norex Corporation is a manufacturer of electronic equipment. The large, diversified organization is decentralized and has a number of different divisions. The components division makes electronic components that can be sold either internally to the equipment division or sold to outside customers. Currently, the components division is producing a tiny motor that is often used to run fans to cool equipment. The variable cost of making the motors is $15 per unit, the fixed cost is $5, and the market price is $28. Production is 100,000 units.
The equipment division uses the motor when assembling small fans that are sold to computer manufacturers. Currently, the equipment division sells 50,000 fans. The additional variable cost for processing the motors into fans is $8 per unit. Top management is re-evaluating Norex' transfer pricing policies. The managers are considering the following price options: variable cost, fully allocated cost, and market price.
a)Assume the components division has enough capacity to meet both internal and external demand. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate? Explain your reasoning.
b)Assume the components division is operating at full capacity and could sell more units to the outside market. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate? Explain your reasoning.
c)Now assume the selling price for fans is $40 per unit, the transfer price is set at variable cost, and the components division could sell all of the units it produces externally.
1. What is the contribution margin for Norex if the motors are sold externally? What is the contribution margin for the components division if the motors are sold externally?
2. What is the contribution margin for Norex if the motors are sold internally? What is the contribution margin for the components division if the motors are sold internally?
3. Would the managers of the components division be willing to sell any units to the equipment division? Explain.
4. Calculate the opportunity cost of selling all of the motors externally.
5. Recommend a transfer price policy to Norex that could potentially solve any problems of suboptimal decision-making.

Norex Corporation Is a Manufacturer of Electronic Equipment