Galatia Products, Inc., has just purchased a small company that specializes in the manufacturing of electronic tuners that are used as a component part of TV sets. Galatia Products, Inc. is a decentralized company, and it will treat the newly acquired company as an autonomous division with full profit responsibility. The new division, called the Tuner Division, has the following revenue and costs associated with each tuner that it manufactures and sells:

Selling price $20

Expenses:

Variable $11

Fixed (based on a capacity of

100,000 tuners per year) 6

17­­_

Net Income $3_

Galati Products also has an Assembly Division that assembles TV sets. This division is currently purchasing 30,000 tuners per year from an overseas supplier at a cost of $20 per tuner, less a 10% purchase discount. The president of Galatia Products is anxious to have the Assembly Division begin purchasing its tuners from the newly acquired Tuner Division in order to "keep the profits within the corporate family."

REQUIRED

For (1) through (2) below, assume that the Tuner Division can sell all its output to outside TV manufacturers at the normal $20 price.

1. Are the managers of Tuner and Assembly Divisions likely to voluntarily agree to a transfer price for 30,000 tuners each year? Why or why not?
2. If the Tuner Division meets the price that the Assembly Division is currently paying to its overseas supplier and sells 30,000 tuners to Assembly Division each year, what will be the net effect on the profits of the Tuner Division, the Assembly Division, and the company as a whole? Show relevant calculations.

For (3) through (5) below, assume that the Tuner Division is currently selling only 60,000 tuners each year to outside TV manufacturers at the stated $20 price.

1. Are the managers of the Tuner and Assembly Divisions likely to voluntarily agree to a transfer price for 30,000 tuners each year? Why or why not?
2. Suppose that the Assembly Division's overseas supplier drops its price (net of the purchase discount) to only $16 per tuner. Should the Tuner Division meet this price? Explain. If the Tuner Division doesnot meet this price, what will be the effect on the profits of the company as a whole?
3. Refer to (4) above. Assume that due to inflexible management policies, the Assembly Division is required to purchase 30,000 tuners each year from the Tuner Division at $20 per tuner. What will be the effect on the profits of the company as a whole?