Dukes Computing Systems
Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1)Production and (2)Marketing.The Marketing Division has always purchased a particular motherboard from Production at $65 per unit.The Production Division is considering raising the price to $75 per unit.The Production Division's costs related to the motherboard production is as follows:

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125.Marketing Division incurs monthly fixed costs of $5,000.Marketing Division sells 2,000 units per month.Marketing Division can buy the same motherboard from outside suppliers for $75.
Refer to Dukes Computing Systems.If the Marketing Division purchases the motherboard from outside suppliers,the facilities the Production Division uses to manufacture the motherboard would remain idle.The Production Division is operating below capacity because of weak global demand for the product.
What should be the motherboard transfer price be between the Production Division and Marketing Division in order for Dukes' to optimize profits?
A)$ 55
B)$ 65
C)$ 75
D)$125

Question

Dukes Computing Systems
Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1)Production and (2)Marketing.The Marketing Division has always purchased a particular motherboard from Production at $65 per unit.The Production Division is considering raising the price to $75 per unit.The Production Division's costs related to the motherboard production is as follows:

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125.Marketing Division incurs monthly fixed costs of $5,000.Marketing Division sells 2,000 units per month.Marketing Division can buy the same motherboard from outside suppliers for $75.
Refer to Dukes Computing Systems.If the Marketing Division purchases the motherboard from outside suppliers,the facilities the Production Division uses to manufacture the motherboard would remain idle.The Production Division is operating below capacity because of weak global demand for the product.
What should be the motherboard transfer price be between the Production Division and Marketing Division in order for Dukes' to optimize profits?
A)$ 55 
B)$ 65 
C)$ 75 
D)$125

Quizplus · Accepted Answer

If the Marketing Division purchases the motherboard from outside suppliers, it would incur a cost of $75 per unit. On the other hand, the Production Division's cost of making the motherboard is $50 per unit. Therefore, if the Production Division sells the motherboard to the Marketing Division for a price between $50 and $75 per unit, both divisions will be better off than if the Marketing Division purchases from outside suppliers.

However, if the Production Division charges more than $65 per unit, the Marketing Division could buy from outside suppliers and still make a profit. If the Production Division charges less than $65 per unit, they will not be maximizing their profits. Therefore, the optimal transfer price between the Production and Marketing Division would be $65 per unit.

Dukes Computing Systems Dukes Computing Systems Manufactures and Sells Various Computer Products and Computer