Reference no: EM132919057

Newton Corporation has two divisions: Dakota and Maxwell. Dakota currently sells a diode reducer to manufacturers of aircraft navigation systems for $775 per unit. Variable costs amount to $500 per unit. Demand for the diode reducer is currently greater than Dakota's ability to supply the marketplace, which is not anticipated to change.

Despite this situation, Newton is considering another use for the diode reducer, namely, integration into a satellite positioning system that would be made by Maxwell. The positioning system has an anticipated selling price of $1,400 and Maxwell would incur $670 of variable manufacturing costs per system (in addition to the diode reducer). Newton top management has decided that Maxwell will pay a transfer price of $750 for each diode reducer.

Top management is anxious to produce and sell the positioning system; however, unless the diode reducer is supplied by Dakota, this will not be possible because of the difficulty of obtaining these from other sources. Dakota and Maxwell are in the process of recovering from previous financial problems, and neither division can afford any future losses.

Required:

Problem 1. Explain how Dakota's divisional manager would likely react to the decision to transfer diode reducers to Maxwell? Show computations to support your answer.

Problem 2. Explain how Maxwell's divisional manager would likely react to the $750 transfer price? Show computations to support your answer.

Problem 3. Assume that a lower transfer price is desired. Should top management lower the price or should the price be lowered by another means? Explain.

Problem 4. From a corporate profitability perspective, does Newton benefit more if the diode reducers are sold in the external marketplace or transferred to Maxwell? By how much? Explain