Reference no: EM132993347

Question - LG is a decentralised multidivisional corporation. LG Ltd's Electronic Division produces smart televisions that require one square metre of special integrated circuit boards. The Electronic division can purchase this material for $100 plus a $5 inspection fee per square metre from an outside supplier. Alternatively, it could purchase this material from LG Ltd's Assembly Div.

The incremental (variable) cost of manufacturing one square metre of special integrated circuit boards required per television is $80 in the Assembly Div. The Assembly Div is currently producing at 60% of its monthly capacity of 20,000 square metres. It currently charges $90 per square metre for special integrated circuit boards sold to external customers.

The Electronic Div will produce 7,500 smart televisions per month at first.

Required -

1- What is the lowest price at which LG Ltd's Assembly Div would be willing to sell one square metre of special integrated circuit boards to LG Ltd's Electronic Div?

2. Assume that the division's monthly production plans increase to 12,500 units. Would this affect the Assembly Div's willingness to sell each square metre of special integrated circuit boards to the Electronic Div at a lower price?

3. What is the maximum the Division will pay the Assembly Div for a square metre of special integrated circuit boards?

4- Assume that a new external supplier offers the Div $78 for the special integrated circuit boards (plus a $5 inspection fee). How much of the 12,500 units required by the Div should be transferred by the Assembly Division, in terms of LG Ltd as a whole? Which transfer pricing policy is most likely to achieve this? Explain briefly.