What is a management control system?

(J. Patell, adapted) Sierra Inc. consists of a semiconductor division and a process-control division, each of which operates as an independent profit center. The semiconductor division employs craftsmen who produce two different electronic components: the new highperformance Xcel-chip and an older product called the Dcel-chip. These products have the following cost characteristics: Due to the high skill level necessary for the craftsmen, the semiconductor division's capacity is set at 55,000 hours per year. Maximum demand for the Xcel-chip is 13,750 units annually, at a price of 130 dollar per chip. There is unlimited demand for the Dcel-chip at 65 dollar per chip. The process-control division produces only one product, a process-control unit, with the following cost structure: \(\bullet\)Direct materials (circuit board): 80 dollar \(\bullet\)Direct manufacturing labor (3.5 \(\text { hours }\) times 10 dollar): 35 dollar The current market price for the control unit is 125 dollar per unit. A joint research project has just revealed that a single \(X\) cel-chip could be substituted for the circuit board currently used to make the process-control unit. The direct manufacturing labor cost of the processcontrol unit would be unchanged. The improved process-control unit could be sold for 185 dollar. 1\. Calculate the contribution margin per direct-labor hour of selling Xcel- chip and Dcel-chip. If no transfers of Xcel-chip are made to the process- control division, how many Xcel-chips and Dcel-chips should the semiconductor division manufacture and sell? What would be the division's annual contribution margin? Show your computations. 2\. The process-control division expects to sell 1,250 process-control units this year. From the viewpoint of Sierra Inc. as a whole, should $1,250 \mathrm{Xcel}$ -chips be transferred to the process-control division to replace circuit boards? Show your computations. 3\. What transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations. 4\. If labor capacity in the semiconductor division were 60,000 hours instead of 55,000 , would your answer to requirement 3 differ? Show your calculations.

What is one potential limitation of full-cost-based transfer prices?

Beacon, a division of Libra Corporation, is located in the United States. Its effective income tax rate is \(30 \%\). Another division of Libra, Falcon, is located in Canada, where the income tax rate is \(40 \% .\) Falcon manufactures, among other things, an intermediate product for Beacon called XPS-2022. Falcon operates at capacity and makes 15,000 units of \(X P S-2022\) for Beacon each period, at a variable cost of 28 dollar per unit. Assume that there are no outside customers for XPS-2022. Because the XPS-2022 must be shipped from Canada to the United States, it costs Falcon an additional 4 dollar per unit to ship the \(\mathrm{XPS}-2022\) to Beacon. There are no direct fixed costs for \(\mathrm{XPS}-2022 .\) Falcon also manufactures other products. A product similar to XPS-2022 that Beacon could use as a substitute is available in the United States for 38.50 dollar per unit. 1\. What is the minimum and maximum transfer price that would be acceptable to Beacon and Falcon for XPS-2022, and why? 2\. What transfer price would minimize income taxes for Libra Corporation as a whole? Would Beacon and Falcon want to be evaluated on operating income using this transfer price? 3\. Suppose Libra uses the transfer price from requirement 2 and each division is evaluated on its own after-tax division operating income. Now suppose Falcon has an opportunity to sell 8,000 units of \(X P S\) 2022 to an outside customer for 31 dollar each. Falcon will not incur shipping costs because the customer is nearby and offers to pay for shipping. Assume that if Falcon accepts the special order, Beacon will have to buy 8,000 units of the substitute product in the United States at 38.50 dollar per unit. a. Will accepting the special order maximize after-tax operating income for Libra Corporation as a whole? b. Will Beacon want Falcon to accept this special order? Why or why not? c. Will Falcon want to accept this special order? Explain. d. Suppose Libra Corporation wants to operate in a decentralized manner. What transfer price should Libra set for \(\mathrm{XPS}-2022\) so that each division acting in its own best interest takes actions with respect to the special order that are in the best interests of Libra Corporation as a whole?

What properties should transfer-pricing systems have?

Fenster Corporation manufactures windows with wood and metal frames. Fenster has three departments: glass, wood, and metal. The glass department makes the window glass and sends it to either the wood or metal department where the glass is framed. The window is then sold. Upper management sets the production schedules for the three departments and evaluates them on output quantity, cost variances, and product quality. 1\. Are the three departments cost centers, revenue centers, or profit centers? 2\. Are the three departments centralized or decentralized? 3\. Can a centralized department be a profit center? Why or why not? 4\. Suppose the upper management of Fenster Corporation decides to let the three departments set their own production schedules, buy and sell products in the external market, and have the wood and metal departments negotiate with the glass department for the glass panes using a transfer price. a. Will this change your answers to requirements 1 and \(2 ?\) b. How would you recommend upper management evaluate the three departments if this change is made?