Division A manufactures screens used in high-definition TVs. It sells its one pr
ID: 2465974 • Letter: D
Question
Division A manufactures screens used in high-definition TVs. It sells its one product, a standard screen, for a price of $210 per screen. Variable costs are $90 per screen, and allocated fixed costs amount to $95 per screen. Division B has asked Division A to supply 5,000 custom-made screens. These custom screens have a variable cost of $105 per unit. Division A believes that its standard screen and the custom screen for Division B consume the same amount of capacity to make. It now has the capacity to make 20,000 screen annually. For each of the following scenarios, what is the minimum price per custom screen that Division A can set for this transfer and maintain its profit at the current level?
a. Division A is currently making 12,000 standard screens.
b. Division A is currently making 20,000 standard screens.
c. Division A is making and selling 16,000 standards screens currently. Division B wants to buy all 5,000 screens from Division A or none at all.
Explanation / Answer
a) Since Division A is currently making 12,000 standard screens and it has excess capacity, the minimum price Division A can charge is $105 per unit so that the profit is maintained at current level.
b) Since Division A is currently making 20,000 standard screens and it does not have excess capacity, the minimum price Division A can charge is $225 (105+120) per unit so that the profit is maintained at current level.
c) Since Division A is currently making 16,000 standard screens and it has excess capacity of 4000 screens only, the minimum price Division A can charge is $129 ((225*1000+105*4000)/5000) per unit so that the profit is maintained at current level.