The Ottawa Valley Instrument Company (OVIC) consists of the Semiconductor Division and the Process-Control Division, each of which operates as an independent profit centre. The Semiconductor Division employs craftsmen who produce two different electronic components: the new high-performance Super-chip and an older product called Okay-chip. These two products have the following cost characteristics:
Annual overhead in the Semiconductor Division totals $400,000, all fixed. Due to the high skill level necessary for the craftsmen, the Semiconductor Division’s capacity is set at 50,000 hours per year.
One customer orders a maximum of 15,000 Super-chips per year, at a price of $60 per chip. If OVIC cannot meet this entire demand, the customer curtails its own production. The rest of the Semiconductor Division’s capacity is devoted to the Okay-chip, for which there is unlimited demand at $12 per chip.
The Process-Control Division produces only one product, a process-control unit, with the following cost structure:
◆ Direct materials (circuit board): $60
◆ Direct manufacturing labour (5 hours * $10): $50 Fixed overhead costs of the Process-Control Division are $80,000 per year. The current mar ket price for the control unit is $132 per unit.
A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the process-control unit. Using Super-chip would require an extra one hour of labour per control unit for a new total of six hours per control unit.
1. Calculate the contribution margin per hour of selling Super-chip and Okay-chip. If no transfers of Super-chip are made to the Process-Control Division, how many Super-chips and Okay-chips should the Semiconductor Division sell? Show your computations.
2. The Process-Control Division expects to sell 5,000 process-control units this year. From the viewpoint of OVIC as a whole, should 5,000 Super-chips be transferred to the Process-Control Division to replace circuit boards? Show your computations.
3. If demand for the process-control unit is certain to be 5,000 units but its price is uncertain, what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for OVIC as a whole? (All other data are unchanged.)
4. If demand for the process-control unit is certain to be 12,000 units, but its price is uncertain, what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for OVIC as a whole? (All other data are unchanged.)