Problem 1: Megatron Inc. (Applying Optimal Transfer Pricing Rule) Megatron Inc. has two divisions: a laptops division that manufactures gaming laptops and an electronics division that produces two types of graphic cards – Sapphire and Force. The Sapphire graphic cards can be used in the gaming laptops produced by the laptops division as well as sold externally whereas the Force graphic cards are sold exclusively on the external market. Following is data on the price, costs and hours required for each graphics card: Sapphire Force Selling Price per card $400 $150 Variable Cost per card 100 60 Hours/card 0.6 0.2
The electronics division has a production capacity of 27,000 hours. The external market demand for Sapphire cards is 25,000 and the external market demand for Force cards is 45,000.
The monthly fixed cost of the engines division is currently $7,500,000. One of the parts of the engine is a valve train that is currently manufactured in-house. The variable cost of producing a valve train is $400 (note that this $400 is included in the $2,000 variable cost of the engine). One of the suppliers to the engine division has offered to produce the valve trains for $490 per valve train. If the production of valve trains is outsourced, the manager believes she can also bring down monthly fixed costs of the division from $7,500,000 to $6,000,000.