REQUIREMENT 1

Component Y34 Model SC67 Total

Sales $ 260,000.00 $ 1,680,000.00 $ 1,940,000.00
Variable Expenses $ 160,000.00 $ 920,000.00 $ 1,080,000.00
Contibution Margin $ 100,000.00 $ 760,000.00 $ 860,000.00

REQUIREMENT 2
The transfer price that the manager of components division will set is $12.
Moreover, the minimum and maximum of the transfer price is also $12.

REQUIREMENT 3
PSF Division profit will go down by the change of transfer pricing policy and they
will encounter losses because the current price is $42 and if they used the revised
transfer pricing policy then their cost will be $43.50 and they will have loss of $1.50
per unit. It should be discontinue unless the manager change the market price.

Related Solution for Req. 3

Previous Cost New Cost
Components Y34 $ 6.50 $ 12.00
Direct Materials $ 12.50 $ 12.50
Direct Labor $ 3.00 $ 3.00
Variable Overhead $ 1.00 $ 1.00
Total Variable Cost $ 23.00 $ 28.50
Fixed Overhead $ 15.00 $ 15.00
Total Cost $ 38.00 $ 43.50

REQUIREMENT 4
40,000 units at $12 of Y34 will be sold externally.

REQUIREMENT 5
Previous (FirmWide) New (FirmWide) Difference (A-B)
Sales $ 1,940,000.00 $ 480,000.00
Variable Expenses $ 1,080,000.00 $ 160,000.00
$ 860,000.00 $ 320,000.00 $ 540,000.00

According to my calculation, Cam's decision to grant the additional decentralization

is bad because the contribution margin decrease of $540,000.