Problem
Microelectronics is a large electronics firm with multiple divisions. The circuit board division manu- factures circuit boards, which it sells externally and internally. The phone division assembles cellular phones and sells them to external customers. Both divisions are evaluated as profit centers. The firm has the policy of transferring all internal products at market prices. The selling price of cellular phones is $400, and the external market price for the cellular phone circuit board is $200. The outlay cost for the phone division to complete a phone (not including the cost of the circuit board) is $250. The variable cost of the circuit board is $130.
Required:
a. Will the phone division purchase the circuit boards from the circuit board division? (Show calculations.)
b. Suppose the circuit board division is currently manufacturing and selling externally 10,000 circuit boards per month and has capacity to manufacture 15,000 boards. From the standpoint of Microelectronics, should 3,000 additional boards be manufactured and transferred internally?
c. Discuss what transfer price should be set for (b).
d. List the three most important assumptions underlying your analysis in (b) and (c).