Problem
Midea is a decentralised and diversified global organisation with five core divisions. The company's Electronics Division manufactures a variety of electronics products, including an WM5 circuit board. The division (which is operating at capacity) sells the WM5 electronic circuit board to main customers for RM13.50 each. The electronic circuit boards have a variable production cost of RM10.25 each.
The company's Fuzzy Logic Division has asked the Electronics Division to supply it with a large quantity of WM5 circuit boards for only RM11 each. The Fuzzy Logic Division, which is operating at only 70% of capacity, will put the circuit boards into a timing device that it will manufacture and sell to a large washing machine manufacturer. The cost of the timing device being manufactured by the Fuzzy Logic Division follows: RM
WM5 circuit board (desired cost) 11.00
Other purchased parts (from outside vendors) 35.00
Other variable costs 22.75
Fixed overhead and administrative costs 12.00
Total cost per timing device 80.75
The manager of the Fuzzy Logic Division feels that she can't quote a price greater than RM81 per timing device to the washing machine manufacturer if her division is to get the job. As shown above, in order to keep the price at RM81 or less, she can't pay more than RM11 per unit to the Electronics Division for the WM5 circuit boards. Although the RM11 price for the WM5 circuit boards represents a substantial discount from the normal RM13.50 price, she feels that the price concession is necessary for her division to get the washing machine manufacturer contract and thereby keep its core of highly trained people.
The company uses return on investment (ROI) to measure divisional performance.
1. Assume that you are the head of the Electronics Division. Would you recommend that your division supply the WM5 circuit boards to the Fuzzy Logic Division for RM11 each as requested? Why or why not? Show all computations. Justify your answer.