Cost Accounting (14th Edition)

ASSIGNMENT MATERIAL 805
During the most recent month, 50,000 pounds of aluminum were transferred between the two divisions. The
recycling division’s capacity is 70,000 pounds.
Due to increased demand, the fabrication division expects to use 60,000 pounds of aluminum next
month. Metalife Corporation has offered to sell 10,000 pounds of recycled aluminum next month to the fabrication
division for $5.00 per pound.
1. Calculate the transfer price per pound of recycled aluminum. Assuming that each division is considered
a profit center, would the fabrication manager choose to purchase 10,000 pounds next month
from Metalife?
2. Is the purchase in the best interest of Jeremiah Industries? Show your calculations. What is the cause
of this goal incongruence?
3. The fabrication division manager suggests that $5.00 is now the market price for recycled sheet aluminum,
and that this should be the new transfer price. Jeremiah’s corporate management tends to
agree. The metal recycling manager is suspicious. Metalife’s prices have always been considerably
higher than $5.00 per pound. Why the sudden price cut? After further investigation by the recycling
division manager, it is revealed that the $5.00 per pound price was a one-time-only offer made to the
fabrication division due to excess inventory at Metalife. Future orders would be priced at $5.50 per
pound. Comment on the validity of the $5.00 per pound market price and the ethics of the fabrication
manager. Would changing the transfer price to $5.00 matter to Jeremiah Industries?
Required
Collaborative Learning Problem
22-36 Transfer pricing, utilization of capacity. (J. Patell, adapted) The California Instrument Company
(CIC) consists of the semiconductor division and the process-control division, each of which operates as an
independent profit center. The semiconductor division employs craftsmen who produce two different electronic
components: the new high-performance Super-chip and an older product called Okay-chip. These
two products have the following cost characteristics:
Super-chip Okay-chip
Direct materials $ 5 $ 2
Direct manufacturing labor, 3 hours * $20; 1 hour * $20 60 20
Due to the high skill level necessary for the craftsmen, the semiconductor division’s capacity is set at
45,000 hours per year.
Maximum demand for the Super-chip is 15,000 units annually, at a price of $80 per chip. There is
unlimited demand for the Okay-chip at $26 per chip.
The process-control division produces only one product, a process-control unit, with the following
cost structure:
Direct materials (circuit board): $70
Direct manufacturing labor (3 hours * $15): $45
The current market price for the control unit is $132 per unit.
A joint research project has just revealed that a single Super-chip could be substituted for the circuit
board currently used to make the process-control unit. Direct labor cost of the process-control unit would
be unchanged. The improved process-control unit could be sold for $145.
1. Calculate the contribution margin per direct-labor hour of selling Super-chip and Okay-chip. If no
transfers of Super-chip are made to the process-control division, how many Super-chips and
Okay-chips should the semiconductor division manufacture and sell? What would be the division’s
annual contribution margin? Show your computations.
2. The process-control division expects to sell 5,000 process-control units this year. From the viewpoint of
California Instruments as a whole, should 5,000 Super-chips be transferred to the process-control division
to replace circuit boards? Show your computations.
3. What transfer price, or range of prices, would ensure goal congruence among the division managers?
Show your calculations.
4. If labor capacity in the semiconductor division were 60,000 hours instead of 45,000, would your answer
to requirement 3 differ? Show your calculations.
Required