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(TCO 8) Milton Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers. Miltons Savvy Division manufactures scientific instruments and uses the products of two of Miltons other divisions. The Bored Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Savvy Division using proprietary designs, whereas less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Savvy Division. The costs per unit of the products used by the Savvy Division are presented below. PCB Transistor Direct materials $2.50 $ .80 Direct labor 4.50 1.00 Variable overhead 2.00 .50 Fixed cost .80 .75 Total cost $9.80 $3.05 The Bored Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Savvy Division would sell for $12.25 per unit on the open market. The market price of the transistor used by the Savvy Division is $3.70 per unit. The Bored and Savvy Divisions have negotiated a transfer price of $11.00 per printed circuit board. This price will (Points : 11)

cause the Bored Division to reduce the number of commercial printed circuit boards it manufactures. motivate both divisions as estimated profits are shared. encourage the Savvy Division to seek an outside source for printed circuit boards. demotivate the Bored Division, causing mediocre performance.

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