Norex Corporation is a manufacturer of electronic equipment. The large, diversified organization is decentralized and has...

Norex Corporation is a manufacturer of electronic equipment. The large, diversified organization is decentralized and has a number of different divisions. The components division makes electronic components that can be sold either internally to the equipment division or sold to outside customers. Currently, the components division is producing a tiny motor that is often used to run fans to cool equipment. The variable cost of making the motors is $10 per unit, the fixed cost is $5, and the market price is $20. Production is 100,000 units.

The equipment division uses the motor when assembling small fans that are sold to computer manufacturers. Currently, the equipment division sells 50,000 fans. The additional variable cost for processing the motors into fans is $8 per unit. Top management is re-evaluating Norex’ transfer pricing policies. The managers are considering the following price options: variable cost, fully allocated cost, and market price.

a) Assume the components division has enough capacity to meet both internal and external demand. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate?

b) Assume the components division is operating at full capacity and could sell more units to the outside market. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate?

Expert Solution

Req A: When the selling division i.e. Component division is having enough capacity to fulfill the demands, then the transfer price shall be fixed at variable cost of producing the motors for the component division i.e. $ 10 per unit. As the only cost incurred in making the motors is $10.00 per unit and there is no loss of sales to outsiders, therefore, from the viewpoint of Component division, the minimum price to be fixed as transfer price shall be $10.00 per unit i.e. Variable cost.

Req B: When the component division is already operating at the full capacity, this means supplying the motors to the other division will result in loss of contribution to be earned from outsiders. Therefore, from the viewpoint of component division, they must fix the transfer price at such rate which will cover their variable cost of manufacturing the motors (i.e. $ 10.00 per unit) as well as bear the loss of contribution (i.e. $10 per unit) which would have been earned from outside customer. Therefore, the transfer price shall be market price of the motors.

ekkarill92 answered 1 year ago

Jace is an executive at a large but decentralized corporation that uses the balanced scorecard. It...

Jace is an executive at a large but decentralized corporation that uses the balanced scorecard. It would be reasonable for her to suggest using scorecard cascading to help her large company more effectively ensure that individuals throughout the company support its overriding strategy. True False

Warehouse Location - The FMC Corporation* The FMC Corporation is a large diversified producer of machinery,...

Warehouse Location - The FMC Corporation* The FMC Corporation is a large diversified producer of machinery, chemicals, films, and fibers such as nylon. The company has annual sales which place it in the top hundred corporations in the nation. The study presented in this case was done for FMC's Link-Belt Products Division, manufacturers of a broad line of industrial equipment. The study was done by FMC's own consultants, people who are available to work with any of the company's divisions....

A large retai lchain purchases a certain kind of electronic device from a manufacturer. The manufacturer...

A large retai lchain purchases a certain kind of electronic device from a manufacturer. The manufacturer indicates that the defective rate of the device is 3%. The inspector at the retailer randomly picks 100 items from a shipment. (a) What is the expected value of the number of defective electronic devices? (b) What is the variance of the number of defective electronic devices? (c) What is the standard deviation of the number of defective electronic devices?

Lindsay Electronics, a small manufacturer of electronic research equipment, has approximately 7,000 items in its inventory...

Lindsay Electronics, a small manufacturer of electronic research equipment, has approximately 7,000 items in its inventory and has hired Joan Blasco Paul to manage its inventory. Joan has determined that 11% of the items in inventory are A items, 37% are B items, and 52% are C items. She would like to set up a system in which all A items are counted monthly (every 19 working days), all B items are counted quarterly (every 61 working days), and all...

[The following information applies to the questions displayed below.] Rustafson Corporation is a diversified manufacturer of...

[The following information applies to the questions displayed below.] Rustafson Corporation is a diversified manufacturer of consumer goods. The company's activity-based costing system has the following seven activity cost pools: Activity Cost Pool Estimated Overhead Cost Expected Activity Labor-related $ 22,000 1,000 direct labor-hours Machine-related $ 10,000 8,000 machine-hours Machine setups $ 36,000 800 setups Production orders $ 29,400 600 orders Product testing $ 27,900 900 tests Packaging $ 68,400 3,600 packages General factory $ 56,800 1,000 direct labor-hours Required:...

Howard Electronics, a small manufacturer of electronic research equipment, has approximately 7000 items in inventory and has hired Eng.

Howard Electronics, a small manufacturer of electronic research equipment, has approximately 7000 items in inventory and has hired Eng. Mostafa to manage its inventory. Mostafa has determined that 10% of the items in inventory are A items, 35% are B items, and 55% are C items. He would like to set up a system in which all A items are counted monthly (every 20 working days), and all B items are counted quarterly (every 60 working days), and all C...

Assume you are the marketing manager of a large electronic equipment manufacturing firm. It is the...

Assume you are the marketing manager of a large electronic equipment manufacturing firm. It is the Spring of the year 2004. Your firm has pioneered an electronic book reader that mimics the reading experience on paper and the test-market results have indicated that the new product will be well received. However, as it is a completely new product on the market, the firm is unsure of adoption rates. You are in charge of a large geographical region in Asia and...

The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful...

The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of personal computers, the firm has recently undergone a period of explosive growth, more than doubling its revenues during the last two years. However, the growth has been accompanied by a marked decline in profitability and a precipitous drop in the company’s stock price. You are a financial consultant who has been retained to analyze the company’s performance and...

Poudre Industries is a diversified manufacturing company with a decentralized management structure. Each division is treated...

Poudre Industries is a diversified manufacturing company with a decentralized management structure. Each division is treated as a profit center. One of these divisions is Wellington Processing, which produces a variety of products at a single plant. Wellington operates below capacity. Wellington’s biggest customer for a major product, XB42, is Eaton Industries, another division of Poudre. At the normal production level of 30,000 units, XB42 costs $840 to produce: direct materials, $310; direct labor, $80; overhead, $450). The composition of...

Baxter Corp is a diversified manufacturing company with a decentralized management structure. Each division is treated...

Baxter Corp is a diversified manufacturing company with a decentralized management structure. Each division is treated as a profit center. One of these divisions is Duke Processing, which produces a variety of products at a single plant. Duke operates below capacity. Duke’s biggest customer for a major product, XB42, is Eastwood Industries, another division of Baxter Corp. At the normal production level of 30,000 units, XB42 costs $840 to produce: direct materials, $310; direct labor, $80; overhead, $450). The composition...

Question