Soma Corporation is a multi-divisional company whose managers
have been delegated full profit responsibility and complete
autonomy to accept or reject transfers from other divisions.
Division X produces 2,000 units of a subassembly that has a ready
market. One of these subassemblies is currently used by Division Y
for each final product manufactured, the latter of which is sold to
outsiders for $1,600. Y's sales during the current period amounted
to 2,000 completed units. Division X charges Division Y the $1,100
market price for the subassembly; Division Y has additional
variable costs of $600 per unit. Variable costs for Division X are
$850 per unit.
The manager of Division Y feels that X should transfer the
subassembly at a lower price because Y is currently unable to make
a profit.
Required:
A. Calculate the contribution margins (total dollars and per unit)
of Divisions X and Y, as well as the company as a whole, if
transfers are made at market price.
B. Assume that conditions have changed and X can sell only 1,000
units in the market at $900 per unit. From the company's
perspective, should X transfer all 2,000 units to Y or sell 1,000
in the market and transfer the remainder? Note: Y's sales would
decrease to 1,000 units if the latter alternative is pursued.
Soma Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and complete...
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