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c.Highly decentralized with few interdependencies among subunits
d.Highly centralized with few interdependencies among subunits
4.(CMA) Parkside Inc. has several divisions that operate as
decentralized profit centers. Parkside’s Entertainment Division
manufactures video arcade equipment using the products of two of
Parkside’s other divisions. The Plastics Division manufactures plastic
components; one type is made exclusively for the Entertainment
Division, while other less complex components are sold to external
markets. The products of the Video Cards Division are sold in a
competitive market, but one video card model is also used by the
Entertainment Division. The actual manufacturing cost per unit of the
Entertainment Division is as follows:
Plastics Components
Video Cards
Direct materials used
$1.25
$2.40
Direct manufacturing labor
2.35
3.00
Variable overhead
1.00
1.50
Fixed overhead
0.40
2.25
Total cost per unit
$5.00
$9.15
The Plastics Division sells its commercial products at full cost plus a
25% markup based on cost and believes the proprietary plastic
component made for the Entertainment Division would sell for $6.25
per unit on the open market. The market price of the video card used
by the Entertainment Division is $10.98 per unit.
Assuming the Video Cards Division has no unused capacity, a
transfer price to the Entertainment Division of $9.15 per unit will: