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Relevant Cost - Short Term Decision Making - Special Orders

Short-term Special Order and Pricing Decision
Sample Test Problem-Transfer-Pricing Concession
You are the divisional controller of the US division of Samtech Electronics. Your division is operating at capacity. The Australlian division has asked the US division to supply a sound system (chip and speaker), which it will use in a new model Game Box that it is introducing. The US division currently sells an identical sound system to outside customers for $11.00 each. The Australlian division offered to pay $7.00 for each sound system. The total cost is...

Purchased Parts from outside vendors_______$28.10
Sound system from US Division____________$7.00
Other variable costs______________________$17.50
Fixed overhead__________________________$10.00

Game Box is as follows:
The Australian division is operating at 50% of capacity and this Game Box is an important new product introduction to increase its use of capacity. Based on a target costing approach, the Australlian division management has decided that paying more than $7.00 for the sound system would make production of the Game Box infeasible because the predicted sellling price for the Game Box is only $62.00.
Samtech Electronics evaluates divisional managers on the basis of pretax ROI and dollar profits compared to the budget. Ignore taxes and tarrifs.

1. As divisional controller of the US division, would you recommend supplying the sound system to the Australlian division for $7.00? Why or why not?
2. Would it be to the short run economic advantage of Samtech Electronics for the US Division to supply the sound system to the Australian division? Explain your answer.
3. Discuss the organizational and behavioral difficulties, if any in this inherent situation. As the US Division controller would you advise the Samtech Elecotronics President to do in this situation?


Solution Summary

This solution handles the importance of viewing costs differently when dealing with a short-term decision rather than a long-term decision. The scenario emphasizes a special order situation that requires a decision. In over 500 words you are shown how to analyze a special order situation and make correct decisions for a firm.