Dukes Computing Systems
Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1)Production and (2)Marketing.The Marketing Division has always purchased a particular motherboard from Production at $65 per unit.The Production Division is considering raising the price to $75 per unit.The Production Division's costs related to the motherboard production is as follows:

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125.Marketing Division incurs monthly fixed costs of $5,000.Marketing Division sells 2,000 units per month.Marketing Division can buy the same motherboard from outside suppliers for $75.
Refer to Dukes Computing Systems.The Production Division is operating at maximum capacity because of strong worldwide demand for the product and the Production Division can sell all it produces to outside customers for $75 per motherboard.
What should be the motherboard transfer price between the Production Division and Marketing Division in order for Dukes' to optimize profits?
A)$ 55
B)$ 65
C)$ 75
D)$125

Question

Dukes Computing Systems
Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1)Production and (2)Marketing.The Marketing Division has always purchased a particular motherboard from Production at $65 per unit.The Production Division is considering raising the price to $75 per unit.The Production Division's costs related to the motherboard production is as follows:

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125.Marketing Division incurs monthly fixed costs of $5,000.Marketing Division sells 2,000 units per month.Marketing Division can buy the same motherboard from outside suppliers for $75.
Refer to Dukes Computing Systems.The Production Division is operating at maximum capacity because of strong worldwide demand for the product and the Production Division can sell all it produces to outside customers for $75 per motherboard.
What should be the motherboard transfer price between the Production Division and Marketing Division in order for Dukes' to optimize profits?
A)$ 55 
B)$ 65 
C)$ 75 
D)$125

Quizplus · Accepted Answer

If the Marketing Division were to purchase the motherboard from an outside supplier, it would have to pay $75 per unit. Therefore, if the Production Division were to sell the motherboard to the Marketing Division at a price below $75, the company as a whole would be losing potential profit.
Since the Production Division can sell all the motherboards it produces to outside customers for $75, it would not be profitable for the Production Division to sell the motherboard to the Marketing Division at a lower price than $75. Therefore, the optimal transfer price would be $75 per unit.

Dukes Computing Systems Dukes Computing Systems Manufactures and Sells Various Computer Products and Computer