Reference no: EM132556616

On-On Corporation is a multi-divisional company, and its managers have been delegated full profit responsibility to accept or reject transfers from other divisions. Division A produces 1,000 units of a subassembly that has a ready market. This subassembly is currently used by Division B for a final product, which is sold to outsiders for $1,400. Division A charges Division B the $900 market price for the subassembly. Variable costs are $600 and $550 for Divisions A and B, respectively.

The manager of Division B feels that Division A should transfer the subassembly at a lower price because Division B is currently unable to make a profit.

REQUIRED:

Question A. Calculate the contribution margins (total dollars and per unit) of Division A and B, as well as the company as a whole, if transfers are made at market price.

Question B. Assume that Division A can sell all of its production in the open market. From the perspective of the company as a whole (On-On), should Division A transfer goods to Division B, or sell to the open market and Division B would cease production? Ignore Division B shut down costs. Show full calculations to support your answer.

Question C. Assume that conditions have changed and Division A can sell only 500 units in the market at $800 per unit. From the company's perspective, should Division A transfer all 1,000 units to Division B or sell 500 in the market and transfer the remainder to Division B? Show calculations to support your answer.

Question D. Define goal congruence in the context of responsibility accounting, and explain how 'rewards' are related to responsibility accounting and to goal congruence?

Question E. Explain why a responsibility accounting system is generally more complex in larger organisations when compared to smaller organisations.