Reference no: EM132707823

Sonic TV Ltd operates as a decentralised multidivisional company.

• The Electronic Division (ED) of Sonic TV Ltd is about to start manufacturing commercial televisions, each of which require one square metre of special integrated circuit boards. The Electronic division can purchase this material from the outside market/supplier at $100 plus a $5 inspection cost per square metre. Alternatively, it could choose to purchase this material from the Housing Audio System Division (HASD) of Sonic TV Ltd.

• The Housing Audio System's incremental (variable) cost for manufacturing the one square metre of special integrated circuit boards needed per television is $80 and this division is currently working at 60% of its capacity of 20,000 square metres per month. It currently sells to outside customers at $90 per square metre.

• The Electronic division will initially manufacture 7,500 commercial television units per month.

REQUIRED:

Question A) What is the minimum price at which the Housing Audio System Division (HASD) of Sonic TV Ltd. would be willing to sell one square metre of special integrated circuit boards to the Electronic Division (ED) of Sonic TV Ltd? (show calculations)

Question B) Suppose that the Electronic division's (ED) manufacturing plans increase to 12,500 units per month. Would this alter the minimum price at which the Housing Audio System Division (HASD) would be willing to sell each square metre of special integrated circuit boards to the Electronic Division (ED)? (show calculations)

Question C) What is the maximum price at which the Electronic Division (ED) would be willing to buy one square metre of special integrated circuit boards from the Housing Audio System Division (HASD)? (show calculations)

Question D) Now assume that a new outside supplier offers to sell the special integrated circuit boards to the Electronic Division (ED) at a price of $78 (plus there will still be an inspection cost of $5). From the point of view of Sonic TV Ltd as a whole, how much of the 12,500 units required by the Electronic Division (ED) should be transferred by the Housing Audio System Division (HASD)? Which transfer pricing policy will guarantee this outcome? Briefly explain.

Question E) Suppose the Housing Audio System Division (HASD) was located overseas. What is the most important additional consideration needs to the taken into account by Sonic TV Ltd. in regard to transfer pricing policy?

Question F) In general, briefly discuss the costs and benefits of decentralization.