Reference no: EM132995020
Question - LG Electronics Ltd operates as a decentralised multidivisional company. The Electronic Division of LG Electronics Ltd manufactures smart televisions, each of which requires one square metre of special integrated circuit boards. The Electronic division can purchase this material from an external supplier at $100 plus a $5 inspection cost per square metre. Alternatively, it could purchase this material internally from the Assembly Division of LG Electronics Ltd.
The Assembly Division's incremental (variable) cost for manufacturing one square metre of special integrated circuit boards needed per television is $80. The Assembly Division is currently operating at 60% of its capacity of 20,000 square metres per month. It currently sells one square metre of special integrated circuit boards to external customers at $90 per square metre.
The Electronic Division will initially manufacture 7,500 smart television units per month.
REQUIRED -
A) What is the minimum price at which the Assembly Division of LG Electronics Ltd would be willing to sell one square metre of special integrated circuit boards to the Electronic Division of LG Electronics Ltd? (show calculations)
B) Suppose that the Electronic division's manufacturing plans increase to 12,500 units per month. Would this alter the minimum price at which the Assembly Division would be willing to sell each square metre of special integrated circuit boards to the Electronic Division? (show calculations)
C) What is the maximum price that the Electronic Division would be willing to pay to the Assembly Division for one square metre of special integrated circuit boards? (show calculations)
D) Now assume that a new external supplier offers to sell the special integrated circuit boards to the Electronic Division at a price of $78 (plus there will still be an inspection cost of $5). From the point of view of LG Electronics Ltd as a whole, how much of the 12,500 units required by the Electronic Division should be transferred by the Assembly Division? Which transfer pricing policy will guarantee this outcome? Briefly explain.