Assisi Electronics manufactures motherboards for computers. The company is divided into two
divisions: manufacturing and programming. The manufacturing division makes the board, and the
programming division makes the adjustments required to meet the customer’s specifications
The average total cost per unit of the boards in the manufacturing division is about $450 and the
average total cost per board incurred in the programming division is $100. The average selling price of
the boards is $700. The company is now operating at capacity, and increasing the volume of production
is not a feasible alternative.
In the past, the managers of the two divisions have negotiated a transfer price. The average transfer
price has been about $500, resulting in the manufacturing division recognizing a profit of about $100 per
board. Each of the managers receives a bonus that is proportional to the profit reported by his/her
division.
Karen Barton, the manager of the manufacturing division, has announced that she is no longer willing to
supply boards to the programming division. Sam Draper, the senior purchasing executive for Perugia
Electronics, a computer manufacturer, has indicated that he is willing to purchase, at $650 per unit, all
the boards that Karen’s division can supply and is willing to sign a long-term contract to that effect.
Karen indicated that she offered the boards to the programming division at $625 per board on the
grounds that selling and distribution costs would be reduced by selling inside. Neil Wilson, the manager
of the programming division, refused the offer on the grounds that the programming division would
show a loss at the transfer price.