Kendall Corporation has two divisions: Phoenix and Tucson. Phoenix 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.
Kendall is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Tucson. Related information about the enhanced system follows.
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs required: $820
Transfer price of condenser: $490
Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management.
Required:
A. How would Phoenix's divisional manager likely react to the decision to transfer condensers to Tucson? Show computations to support your answer.
B. How would Tucson'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 Kendall benefit more if it sells the condensers externally or transfers the condensers to Tucson? By how much?

Question

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The Answer of Kendall Corporation has two divisions: Phoenix and Tucson. Phoenix 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.
Kendall is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Tucson. Related information about the enhanced system follows.
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs required: $820
Transfer price of condenser: $490
Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management.
Required:
A. How would Phoenix's divisional manager likely react to the decision to transfer condensers to Tucson? Show computations to support your answer.
B. How would Tucson'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 Kendall benefit more if it sells the condensers externally or transfers the condensers to Tucson? By how much?

Kendall Corporation Has Two Divisions: Phoenix and Tucson