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Parkside Inc. has several divisions that operate as decentralized profit centers. Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions. The Plastics Division manufactures plastic components, one type that is made exclusively for the Entertainment Division, while other less complex components are sold to outside markets. The products of the Video Cards Division are sold in a competitive market; however, one video card model is also used by the Entertainment Division. The actual costs per unit used by the Entertainment Division are presented below.
The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market. The market price of the video card used by the Entertainment Division is $10.98 per unit. Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price willA. Motivate both divisions as estimated profits are shared. B. Cause the Plastics Division to reduce the number of commercial plastic components it manufactures. C. Encourage the Entertainment Division to seek an outside source for plastic components. D. Demotivate the Plastics Division causing mediocre performance. |