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roblem 22-17 Cost Centers, Profit Centers, Decentralization, Transfer Prices.

iven:enster Corporation manufacturers windows with wood and metal frames. Fenster has three departments: Glass,

Wood, and Metal. The Glass Department makes the window glass and sends it to either the Wood or Metal Departmenthere the glass is framed. The window is then sold. Upper management sets the production schedules for the threeepartments and ealuates them on output !uantit", cost ariances, and production !ualit".

Are the three deartments cost centers, reven!e centers, or rofit centers"

specified set of actiities.

The Glass, Wood, and Metal departments are all cost centers. The" are ealuated as cost centers #ased onoutput and ariances from e$pected costs.

Are the three deartments centralized or decentralized"

Centrali%ed: Upper management sets their production schedule

Can a centralized deartment be a rofit center" $h% or &h% not"

&es. Centrali%ation relates to the degree of autonom" that a department has for decision making. This concept isindependent of the t"pe of responsi#ilit" center used to ealuate performance. For e$ample, the Glass departmentcould #e a profit center if upper management sets a transfer price for the glass transferred from the glass to the

Wood and Metal departments. ' department ma" #e organi%ed as a profit center #ut has little decision(makingauthorit". )uch a department would #e a centrali%ed department.

(!ose the !er mana)ement of *enster Cororation decides to let the three deartments set theiro&n rod!ction sched!les, b!% and sell rod!cts in the e+ternal maret, and have $ood and etalDeartments ne)otiate &ith the Glass Deartment for the )lass anes !sin) a transfer rice.a. $ill this chan)e %o!r ans&ers to re!irements 1 and 2"

With these changes, Fenster will #e moing toward a more decentrali%ed enironment #ecause eachdepartment will hae more local decision(making authorit", such as the a#ilit" to set its own productionschedule, #u" and sell products in the e$ternal market, and negotiate transfer prices.

These changes make all three departments profit centers #ecause the managers of each department are

responsi#le for #oth costs and reenues.

b. /o& &o!ld %o! recommend !er mana)ement eval!ate the three deartments if this chan)eis made"

Upper management should ealuate the three departments as profit centers #ecause profits would #e agood indicator of how well each department is doing.

Responsibility Center: ' part, a segment, or a su#unit of an organi%ation whose manager is accounta#le for a

Cost Center: a responsi#ilit" center where the manager is accounta#le for costs onl".

Revenue Center: a responsi#ilit" center where the manager is accounta#le for reenues onl".

Profit Center: a responsi#ilit" center where the manager is accounta#le for reenues and costs.

Investment Center: a responsi#ilit" center where the manager is accounta#le for inestments, reenues and costs.

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Problem 22-20 !ltinational transfer ricin), effect of alternative transfer-ricin) methods,

Tech *riendl% Com!ter, nc., &ith head!arters in (an *rancisco, man!fact!res and sellsthree divisions, each of &hich is located in a different co!ntr%.

a. China division -- man!fact!rers memor% devices and e%boardsb. (o!th orea division -- assembles desto com!ters !sin) locall% man!fact!red

the e%boards from China division.c. 3.(. division -- aca)es and distrib!tes desto com!ters

The three divisions are eval!ated as rofit centers. The costs for &or done in each divisias follo&s:

China Division (o!th orea Div.f). Process emor% devices and e%boards Assembles com!

internall% man!facand memor% device%boards from th

C!rrenc% 4!an $on5+ternal (ellin) Price ',600 memor%e%boards 1,#'0,000

8ariable cost 900 %!an #60,000*i+ed 1,90 %!an '70,000ncome ta+ rate '0; 20;C!rrent 5+chan)e rates 9 9 %!an < =1 dollar 1,000

Conversion to 3.(. C!rrenc% China Division (o!th orea Div.

C!rrenc% 3.( Dollar 3.(. Dollar (ellin) Price =600 memor%e%boards =1,#'08ariable cost 100 #60*i+ed 220 '70ncome ta+ rate '0; 20;

Transfer rice ethodaret Price =600 China to (o!th orea =1,#'0200; of *!ll Cost >'0 2,920#60; of 8ariable Cost #60 2,'60

1. Calc!late the after-ta+ oeratin) income er !nit earned b% each div. !nder the follo&in)

China Division aret Price 200; of *!ll Cost(ellin) Price ?TP@ =600 =>'0Ded!ct:

8C er !nit ?100@ ?100@

*C er !nit ?220@ ?220@Divisional eratin) nc. =10 =2,210 =#20

ncome Ta+ at '0; 72 =2,210 12Divisional B er !nit =10 =192

(o!th orea Div. aret Price 200; of *!ll Cost(ellin) Price ?TP@ =1,#'0 =2,920Ded!ct:

Trans-in from China ?600@ ?>'0@8C er !nit ?#60@ ?#60@

*C er !nit ?'70@ ?'70@

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Divisional eratin) nc. =20 =1,'>0

ncome Ta+ at 20; ' 292

Divisional B er !nit =1> =1,1>

3.(. Division aret Price 200; of *!ll Cost(ellin) Price ?TP@ =#,00 =#,00

Ded!ct:Trans-in from (o!th . ?1,#'0@ ?2,920@8C er !nit ?126@ ?126@

*C er !nit ?#26@ ?#26@Divisional eratin) nc. =2,010 ='#0

ncome Ta+ at #0; >0# 129

Divisional B er !nit =1,'07 =#01

2. $hich transfer-ricin) method?s@ &ill ma+imize the net income er !nit of Tech-*riendl%

aret Price 200; of *!ll CostChina Division =10 =192

(o!th orea Div. 1> =1,1>3.(. Division 1,'07 =#01

Total =1,6#1 =1,>>1

3ser *riendl% &ill ma+imize its B b% !sin) the #60; of variable costs, transfer-ricin)

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)lobal income ta+ minimization

desto com!ter. Tech *riendl% has

rts, alon) &ith memor% devices and

n for a sin)le desto com!ter are

3.(. Divisioners !sin) Paca)es and distrib!tes!red arts desto com!ters

s andChina Div.

3.(. Dollarcom!ter #,00 com!ter

&on 126 dollar&on #26 dollar

#0;1,000 $on < =1 1

3.(. Division

3.(. Dollarcom!ter =#,00 com!ter

126#26#0;

(o!th orea to 3.(.

transfer-ricin) methods:

#60; of 8C=#60

?100@

?220@=2,210 =#0 =2,210

12=1

#60; of 8C=2,'60

?#60@?#60@

?'70@

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=1,20

26>

=1,02'

#60; of 8C=#,00

?2,'60@?126@

?#26@=900

=270

=>#0

desto com!ter"

#60; of 8C=1

=1,02'=>#0

=1,>72

ethod.

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Problem 22-26 Transfer-ricin) dis!te

The ell%-5lias Cororation, man!fact!rer of tractors and other heav% farm

f!ll a!thorit% on all decisions involvin) the sale of that divisions o!t!t both to o!tsiders

and to other divisions of ell%-5lias. Division C has in the ast al&a%s !rchasedits re!irement of a artic!lar tractor-en)ine comonent from Division A. /o&ever, &hen

to !rchase the en)ine comonent from e+ternal s!liers.

insists that, beca!se of the recent installation of some hi)hl% secialized e!iment and theres!ltin) hi)h dereciation char)es, it &ill not be able to earn an ade!ate ret!rn on itsinvestment !nless it raises its rice. Division As mana)er aeals to to mana)ement ofell%-5lias for s!ort in the dis!te &ith Division C and s!lies the follo&in)oeratin) data:

Cs ann!al !rchase of the tractor-en)ine comonent 1,900 !nits

As variable cost!nit of the tractor-en)ine comonent =106As fi+ed cost er !nit of the tractor-en)ine comonent =26

*ell"(+lias utside )upplier

Diision ' Diision C1,900 !nits

tractor(engine component(P < =1#6 --- (P

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will take actions that are in the #est interests of the compan" as a whole.

&o!ld be !sed for other rod!ction oerations that &o!ld res!lt in ann!al cash-

the o!tside so!rce"

Total disadantage of #u"ing the component from outside )ee 1 a#oe./ ?=19,000@

Cash inflow from an alternatie use of Diision '4s facilities =22,00

=#,00

s!liers" $hat sho!ld the transfer rice for the comonent be set at so thatdivision mana)ers actin) in their o&n divisions best interests tae actions that arealso in the best interest of the coman% as a &hole"

Unit cost of #u"ing the components from outside ?=96@

'oida#le cost of manufacturing the components in Diision ' =106Unit adantage of #u"ing a component from outside =10

=19,000

Transfer price:

Minimum that Diision ' seller/ would accept0ncremental costs of making component =106

Ma$imum that Diision C #u"er/ would pa" =96

)ince the ma$imum that Diision C would pa" is less than the minimum that Diision ' wouldaccept, no transfer should take place. Goal congruence would #e achieed with a transfer

price set #" Diision ' e!ual to 5136. 0n this case, Diision C would re7ect the price.

Problem 22-2> Transfer-ricin) roblem

1. Determine &hether ell%-5lias &ill benefit if Division C !rchases the 1,000

Unit cost of #u"ing the component from outside ?=116@

'oida#le cost of manufacturing the component in Diision ' =106

Unit disadantage of #u"ing the component from outside ?=10@

Total disadantage of #u"ing the component from outside ?=19,000@

=67,000

=#,000

2. Ass!me that internal facilities of Division A &o!ld notother&ise be idle. % notrod!cin) the 1,900!nits for Division C, Division As e!iment and other facilities

oeratin) savin)s of =22,00. (ho!ld Division C !rchase the comonent from

'dantage of #u"ing 1,900components from outside source

#. Ass!me that there are noalternative !ses for Division As internal facilities andthat the rice from o!tsiders dros =20. (ho!ld Division C !rchase from e+ternal

Total adantage of #u"ing the 1,900components from outside

'ssume that Diision ' can sell the 1,900units to other customers at =1#7per unit, with aria#lemarketing costs of =2per unit.

comonents from e+ternal s!liers at =116er !nit.

'lternatie use of facilities: 1,9008 =1#7( =106( =2/ 9

Bet benefit of Div. C b!%in) o!tside at =116E alternative sales b% Div. A at =1#7

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Problem 22-2 Pertinent transfer rice, erfect and imerfect marets.

$heel%, nc., has t&o Divisions, A and , that man!fact!re e+ensive bic%cles. Division Arod!ces the bic%cle frame, and Division assembles the rest of the bic%cle onto the frame.There is a maret for both the s!bassembl% and the final rod!ct. 5ach division has beendesi)nated as a rofit center. The transfer rice for the s!bassembl% has been set at the

lon)-r!n avera)e maret rice. The follo&in) data are available for each division:

(ellin) rice for final rod!ct ?Division s sellin) rice@ =#>0Fon)-r!n avera)e sellin) rice for intermediate rod!ct 276ncremental cost er !nit for comletion in Division 120ncremental cost er !nit in Division A 90

The mana)er of Division has made the follo&in) calc!lation:

$heel%

Division A Division roduces Frame 'ssem#les ;ike

Final )elling rice =#>0Frame4s 00ncremental unit costs associated with Diision ' ?90@

0ncremental unit costs associated with Diision ; ?120@

Unit contri#ution from sale of #ikes =160

=#6

The general guideline transfer price can #e calculated as follows:

inim!m transfer rice < Additional !nit incremental costs ! to oint of transfer 3nit oort!nit% cost of main) the tra

Minimum transfer price 9 523 ? 5@A6 ( 523/ 9 5@A6 which is the market price of frames

Use of this T would result in a negatie CM of 5=6 per unit transferred. Thus, no transfers would take pl

Final selling price of assem#led #ikes =#>0General guideline unit transfer price associated with frames from Diision ' ?276@

0ncremental unit costs associated with Diision ; ?120@

Unit contri#ution from sale of #ikes gien a transfer price of 5@A6 ?=#6@

1. (ho!ld transfers be made to Division if there is no!n!sed caacit% in Division A" s the

Unit CM loss resulting from transfers if there is noe$cess capacit" in Diision '

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Diision ; must either drop the product or reduce the incremental costs of assem#ling #ikes from 51@3 tothan 5B6.

inim!m transfer rice < Additional !nit incremental costs ! to oint of transfer 3nit oort!nit% cost of main) the tra

inim!m transfer rice accetable to Division A ?seller@ < =90 0 < =90.

a+im!m transfer rice accetable to Division ?b!%er@ is =2'0. An% hi)her TP &o!ld res!lt in a loss to Division .

For e$ample, assume a T of 5@63 which is outside of the range of negotiation. =260

Unit CM from transfer sale/ of frames from Di. ' to Di. ;:Diision '4s selling price to Diision ; =260

0ncremental costs of producing frames ?90@Unit CM from transfer of frames from Di. ' to Di. ; accrued in Di. '/ =1>0

Unit CM from transfer of frames to Diision ; accompanied #" assem#l" and sale of #ikesFinal selling price of assem#led #ikes =#>00ncremental unit costs associated with Diision ' ?260@

0ncremental unit costs associated with Diision ; ?120@

Unit contri#ution from sale of #ikes accrued in Di. ; ?=10@

erall unit contri#ution margin per unit transferred accruing to the compan" 5163

Bote: The follo&in) sched!le s!mmarizes the transfer rices for !nits transferred from A to .

Profit to

Units Transfer rice inim!m TP < =90 =0 < =90 Div. 3 ( =33 523 ( 5@3 a+im!m TP < =2'0 Div. A

=31 ( 1,@33 5@A6 TP < =90 ?=276 - =90@ < =276 Bo Transfer

to the coman% as a &hole if a transfer &ere made" As a mana)er of Division , &o!ld %o! be

Unit Contri#ution margin from transfer sales/ of frames from Di. ' to Di. ;:Diision '4s selling price to Diision ; =2'0

0ncremental costs of producing frames ?90@

Unit CM from transfer sale/ of frames from Di. ' to Di. ; =160

Unit CM from transfer of frames to Diision ; accompanied #" assem#l" and sale of #ikesFinal selling price of assem#led #ikes =#>0Transfer price per unit transferred from Diision ' to Diision ; ?2'0@

0ncremental unit costs associated with Diision ; ?120@

Unit contri#ution from sale of #ikes 53

2. Ass!me that Division As ma+im!m caacit% for this rod!ct is 1,200!nits er month, and sales to theintermediate maret are no& 900!nits. (ho!ld #00!nits be transferred to Division " At &hat transf

rice" Division A &ill maintain the e+ternal =276sellin) rice indefinitel%.

The coman% as a &hole &o!ld rofit b% transferrin) re)ardlessof the TP !sed:

#. (!ose Division A !oted a transfer rice of =2'0for ! to #00!nits. $hat &o!ld be the C

inclined to b!% at =2'0"

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erall unit contri#ution margin per unit transferred =160

)ince all of the CM generated from the transfers is allocated to Diision ', there is little incentiefor Diision manager ; to #u" from '.

Bote: The transfer rice that ma% aear otimal in an economic anal%sis, ma% in fact, be totall%!naccetable from the vie&oints of ?1@ reservin) a!tonom% of the mana)ers, and ?2@ eval!atin)

the erformance of divisions as economic !nits. Transfer rices allocate contrib!tion amon) divisions.

oeratin) income for Division A. $hat transfer rice &o!ld rod!ce the same oeratin) incomefor Division A" s that rice consistent &ith that recommended b% the )eneral )!ideline in thechater so that the res!ltin) decision &o!ld be desirable for the coman% as a &hole"

(ol!tion aroach H1:otential CM from e$ternal intermediate sale: 1,@33 8 5@A3 ( 523/ 9 5@1,333

otential CM if ) is keep at 5@A6 with sales olume of 233 units: 233 8 5@A6 ( 523/ 9 51,633Total CM that needs to #e generated #" the remaining =33 units 52,633

Eemaining units =33CM per unit that needs to #e generated #" each of the remaining @33 units 516

0ncremental costs per unit to produce #ic"cle frames in Diision ' 23

'ppropriate transfer price necessar" to generate 566,633 of CM 5@66

(ol!tion aroach H2:6 < =266 16

+$panded

caacit%.

a. 3sin) the )eneral )!ideline, &hat is ?are@ the minim!m transfer rice?s@ that sho!ld lead to thecorrect economic decision" )nore erformance-eval!ation considerations.

0f 1,133 units are sold #" Diision ' at 5@A3:inim!m transfer rice < Additional !nit incremental costs ! to oint of transfer 3nit oort!nit% cost of main) the tra

inim!m transfer rice < =90 ?=0@ < =90 for the 100 !nits remainin)

Th!s TP for 1 - 100 !nits sho!ld be set at =90

'. (!ose the mana)er of Division A has the otion of ?a@ c!ttin) the e+ternal rice to =270, &iththe certaint% that sales &ill rise to 1,200!nits, or ?b@ maintainin) the e+ternal rice of =276forthe 900!nits and transferrin) the #00!nits to Division at a rice that &o!ld rod!ce the same

6. (!ose that if the sellin) rice for the intermediate rod!ct is droed to =270, sales to e+ternal artco!ld be increased to 1,100!nits. Division &ants to ac!ire as man% as #00!nits if the transfer riaccetable. *or simlicit%, ass!me that there is no e+ternal maret for the final 100!nits of Division

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0f more than 133 units are needed:inim!m transfer rice < Additional !nit incremental costs ! to oint of transfer 3nit oort!nit% cost of main) the tra

!st s&itch from 1,100 I ?=270 - =90@ < 512B,333

To 900 I ?=276 - =90@ < 51,633

Contrib!tion mar)in that m!st be covered b% the ne+t 200 !nits transferred 5=1,633/

inim!m transfer rice < =90 ?=#1,600200@ < =90 =167.60 < =2'7.60

Th!s TP for 101 - 200 !nits sho!ld be set at =2'7.60

Diision ; would re7ect this #ecause T of 5@A.63 would make ;ikes unprofita#le 5=3 ( 5@A.63 ( 51@3een though it would #e profita#le to compan" as a whole #ut not as profita#le as transferring onl" 133.

f more than 200 !nits need to be transferred then

inim!m transfer rice < Additional !nit incremental costs ! to oint of transfer 3nit oort!nit% cost of main) the tra

inim!m transfer rice < =90 ?=276 - =90@ < =276

b. Comare the total contrib!tion !nder the alternatives to sho& &h% the transfer rice?s@ recommen

lead?s@ to the otimal economic decision.

ptions: Transfer none Transfer 100 Transfer #00 1,133 8 5@A3 ( 523/ 512B,333

1,133 8 5@A3 ( 523/ 512B,333133 8 5=3 ( 523 ( 51@3/ 516,333

233 8 5@A6 ( 523/ 51,633

=33 8 5=3 ( 523 ( 51@3/ 9 56,333

Total Contri#ution 512B,333 5@1=,333 5@11,633

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sfer

ce.

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less

sfer

(ee J#

r

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sfer

ies e is

s

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sfer

9 5A.63/

sfer

ed

5A.63

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Problem 22-#> 1'th 5dition Transfer ricin), !tilization of caacit%

The California nstr!ment Coman% ?CC@ consists of the (emicond!ctor Divisionoerates as an indeendent rofit center. The semicond!ctor division emlo%s crcomonents: the ne& hi)h-erformance (!er-chi and an older rod!ct calledcost characteristics:

California nstr!ment Com

(emicond!ctor Division0ndependent rofit Center/

Prod!ction: (!er-Chi a%-ChiDirect aterials =6 =2Direct f). Fabor /o!rs # 1 Fabor rateho!r =20 =20

Total =>0 =20Total Direct f). Costs =>6 =22Caacit% in Direct Fabor /rs. '6,000

(ales:(!er-Chi C!stomer a+im!m Demand K =0 16,000

(ellin) Price =0a%-Chi C!stomers a+im!m Demand K =2> 3nlimited (ellin) Price =2>

Loint Mesearch ProNect Mevealed that: ?1@ a sin)le (!er-Chi co!ld be s!bstit!ted for the circ!it board !sed t

?2@ the imroved rocess-control !nit co!ld be sold for =1'6.

1. Calc!late the C er DF ho!r of sellin) (!er-Chis and a%-Chis. f no traProcess-Control Division, ho& man% (!er-Chis and a%-Chis sho!ld the$hat &o!ld be the divisions ann!al contrib!tion mar)in"

(!er-Chi a%-ChiC er DF ho!r

(ellin) Price =0 =2>8ariable f). Costs ?>6@ ?22@Contrib!tion ar)in er chi =16 ='Direct f). Fabor /o!rs Me. # 1

C er DF ho!r =6 ='

eca!se the C er DF ho!r is hi)her for (!er-Chi than for a%-Chi,

Chis. (ee belo& -- no caacit% to rod!ce an% a%-Chis.

(!er-Chis:a+im!m Available DF /o!rs '6,000a+im!m (ales Potential 16,000 ?'6,000@a%-ChiDF /o!rs Available for a%-Chis 0

and sell as man% (!er-Chis ?16,000@ as it can. An% remainin) available c

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/o!rs re!ired for a%-Chis 1a+. Prod!ction of a%-Chis 0CChi =16 ='

a+im!m Potential Contrib!tion =226,000 =0

enefit of Transfer to Process-Control Division:Cost savin)s from e+ternal circ!it board not needed =70

Cost of (!er-Chi transferred to PCD >6Cost savin)s er !nit transfer to PCD =6

5+tra reven!e )enerated from imroved PC3 Be& sellin) rice =1'6

ld sellin) rice 1#2 1#5+tra !nit contrib!tion mar)in to PCD =1

3nits to be transferred 6,000Total enefit to PCD =90,000

Disadvanta)e of Transfer to (emicond!ctor DivisionFost C!nit er !nit of (!erchi transferred ?=16@

3nits of (!er-Chi transferred to PCD 6,000 ?76,000@

Bet benefit to CC of transferrin) 6,000 (!er-Chis =16,000

#. $hat transfer rice, or ran)e of rices, &o!ld ens!re )oal con)r!ence amon) t

inim!m TP er (!er-Chi < ncremental cost er !nit to t. of transfer oinim!m TP er (!er-Chi < =>6 =16 < =0

/o&ever, if the mana)er of the Process-Control Division comares the =0 s!)

l!s the contrib!tion mar)in increase &hich co!ld be lost if the transfer does

Bote: the ran)e of ne)otiation is from =0 ?minimal accetable amo!nt to theamo!nt accetable to the Process-Control Division@.

re!irement # differ" >0,000 '6,000

1. Prod!ce a%-Chis for o!tside sales ?16,000@, or2. Prod!ce 6,000 (!er-Chis for transfer to the Process-Control Division

tion 1: Prod!ce E (ell 16,000 a%-Chis E (ell 6,000 Me)!lar PC3

5+tra ho!rs available 16,000

/o!rs re!ired er !nit of a%-Chis rod!ced 1

5+tra !nits of a%-Chis &hich can be rod!ced 16,000

Prod!ce E (ell a%-Chis(ales of 16,000 a%- chis =2> #90,000

8ariable f). Costs of a%-chis ?22@ ?##0,000@

2. The Process-Control Division e+ects to sell 6,000control !nits this %ear. *ro

sho!ld 6,000(!er-chis be transferred to the Process-Control Division to re

rice for circ!it boards ?=70@, the transfer rice &ill be &ron)f!ll%reNected.

The =0 TP sho!ld be comared &ith =#&hich is determined b% tain) the o!

'. f labor caacit% in the semicond!ctor division &ere >0,000ho!rs instead of '6

f the e+ternal sellin) rice of (!er-Chis is held ti)ht at =0, then the e+tra h

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Contrib!tion mar)in from a%-chis =' =>0,000

(ales of Bormal Process-Control 3nit(ales of 6,000 Me)!lar PC3s =1#2 =>>0,000!tside cost of circ!it board ?70@ ?#60,000@

Direct f). Fabor ?'6@ ?226,000@

Contrib!tion mar)in from re)!lar PC3s =17 =6,000

Total C tion H1 =1'6,000

tion 2: Prod!ce (!er-Chi E Transfer to PCD E (ell mroved PC3

5+tra ho!rs available 16,000

/o!rs re!ired er !nit rod!ced #

5+tra !nits &hich can be rod!ced 6,000

(ales of imroved Process-Control 3nit =1'6 =726,0008ar. f). Costs &ithin (emicond!ctor Div. ?>6@ ?#26,000@

Fabor costs &ithin Process-Control Division ?'6@ ?226,000@Contrib!tion mar)in mroved PC3 =#6 =176,000

enefit of tion 2 =#0,000

ncremental Aroach:(P Gain =1'6 =1#2 =>6,000

Cost (avin)s =70 =>6 26,0005+tra C from mroved PC3 =90,000

C from a%-chis lost ?>0,000@

enefit of transfer =#0,000

inim!m TP er (!er-Chi < ncremental cost er !nit to t. of transfer oinim!m TP er (!er-Chi < =>6 ?=>0,0006,000@ < =>6 =12 < =77

Bote the ran)e of ne)otiation is from =77 ?minimal accetable amo!nt to the (amo!nt accetable to the Process-Control Division@.

Proof: Transfer 6,000 (!er-Chis to rod!ce an mroved Process-Control 3

Transfer K =77

(D PCD(ales of imroved PC3 =1'6 =726,000(ales rice ?TP@ of (!er-Chi =77 =#6,000 ?=#6,000@Fess incremental rod!ction costs

Cost er !nit of (!er-Chi ?=>6@ ?=#26,000@ Fabor costs &ithin PCD ?='6@ ?=226,000@

=>0,000 =116,000

Transfer K =#

(D PCD(ales of imroved PC3 =1'6 =726,000(ales rice ?TP@ of (!er-Chi =# ='16,000 ?='16,000@Fess incremental rod!ction costs

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Cost er !nit of (!er-Chi ?=>6@ ?=#26,000@

Fabor costs &ithin PCD ?='6@ ?=226,000@

=90,000 =6,000

Bote: The sol!tion man!al has the follo&in) ans&er for the transfer rice r

Of 16,000 additional labor ho!rs &ere available in the (emicond!ctor Divisi16,000 a%-chis ?at 1 labor ho!r er chi@, or be !sed to man!fact!re 6,0transfer to the Process-control Division. The (emicond!ctor Division man

and sell three a%-chis at =2> each for ever% one (!er-chi transferred,

Can %o! determine &h% the ans&er boo sol!tion is in error" /int: =>> no

/idden ro&s

e!al to the oort!nit% cost of the lost sales of a%-chis. eca!se the

=7 ?# I =2>@. The ma+im!m rice &o!ld remain at =#.O

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and the Process-Control Division, each of &hich aftsmen &ho rod!ce t&o different electronic

a%-chi. These t&o rod!cts have the follo&in)

an%

Process-Control Division0ndependent rofit Center/

Process-ControlProd!ction: 3nitDirect aterials ?Circ!it oard@ =70Direct f). Fabor /o!rs # Fabor rateho!r =16

Total ='6Total Direct f). Costs =116

(ales:Process-Control 3nit J!antit% " (ellin) Price =1#2

>>

rod!ce the rocess-control !nit=1'6

sfers of (!er-Chis &ere made to theemicond!ctor Division man!fact!re and sell"

A nstr!ment Coman% sho!ld rod!ce acit% sho!ld be !sed to rod!ce a%-

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he division mana)ers"

ort!nit% cost lost er !nit transferred

)ested TP &ith the o!tside !rchase

ot tae lace ?=1'6-=1#2 or =1#@.=#

emicond!ctor Division@ to =# ?ma+im!m

the vie&oint of CC as a &hole,

lace circ!it boards"

tside rice for the circ!it board ?=70@

,000, &o!ld %o!r ans&er to

!rs co!ld be !sed to either

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ort!nit% cost lost er !nit transferred

micond!ctor Division@ to =# ?ma+im!m

it

=176,000

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=176,000

an)e.

on, those ho!rs co!ld be !sed to man!fact!re 0 (!er-chis ?at # labor ho!rs er chi@ for

)er &o!ld re!ire a transfer rice at least

the minim!m re!ired transfer rice &o!ld be

=>6.

emicond!ctor Division co!ld man!fact!re

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Problem 22-17

specified set of actiities.

1. Are the man!fact!rin) lants in the an!fact!rin) Division cost centers or rofit centers"

The manufacturing plants in the Manufacturing Diision are cost centers.

)enior management determines the mfg. schedule #ased on the !uantit" of each t"pe of lighting#" the sales and marketing diision and detailed studies of the time and cost to manufacture eac

Manufacturing managers are accounta#le onl" for costs. The" are ealuated #ased on achieinwithin #udgeted costs.

2. J!inn Cororation is considerin) decentralizin) its maretin) and man!fact!rin) decisionman!fact!rin) and maretin) mana)ers directl% ne)otiate the rices for man!fact!rin) va

a. /o& sho!ld J!inn eval!ate man!fact!rin) lant mana)ers !nder this roosal"

0f manufacturing and marketing managers were to directl" negotiate the prices for manufactuproducts, uinn should ealuate manufacturing plant managers as profit centers. rofit woulreenues earned from marketing minus the costs incurred to produce and sell output.

b. $o!ld %o! recommend that J!inn Cororation decentralize its maretin) and man!fac

&es. Then each diision could #e ealuated as a profit center.

Decentrali%ation should encourage plant managers to increase total output to achiee the grand to cut their costs to increase margins.

Manufacturing managers should #e motiated to design their operations according to the critmarketing managers4 approal, there#" improing cooperation #etween manufacturing and

Under uinn4s e$isting s"stem, manufacturing managers had eer" incentie not to improe.incenties were to get as high a cost target as possi#le so that the" could produce output wit

'n" significant improements could result in the target costs #eing lowered for the ne$t "ear,possi#ilit" of not achieing reised #udgeted costs.

;" the same line of reasoning, manufacturing managers would also tr" to limit their productio!uotas would not #e increased in the future. Decentrali%ing manufacturing and marketing dethese pro#lems.

Responsibility Center: art, segment, or su#unit of an organi%ation whose manager is accoun

Cost Center: Eesponsi#ilit" center where the manager is accounta#le for costs onl".

Revenue Center: Eesponsi#ilit" center where the manager is accounta#le for reenues onl".

Profit Center: Eesponsi#ilit" center where the manager is accounta#le for reenues and costs.

Investment Center: Eesponsi#ilit" center where the manager is accounta#le for inestments, r

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5+lain.

product specified h t"pe of product.

target output

s b% lettin)rio!s rod!cts.

ring ariousld #e determined as

t!rin) decisions"

atest profita#ilit",

ria that meet the arketing.

Manufacturing managers4in #udgeted costs.

increasing the

n so that productioncisions oercomes

a#le for a

enues and costs.