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Question: The Ottawa Valley Instrument Company (OVIC)

The Ottawa Valley Instrument Company (OVIC) consists of the semiconductor division and the process-control division, each of which operates as an independent profit centre. The semiconductor division employs craftsmen who produce two different electronic components: the new high-performance Super-chip and an older product called Okaychip. These two products have the following cost characteristics:
The Ottawa Valley Instrument Company (OVIC) consists of the semiconductor division and the process-control division, each of which operates as an independent profit centre. The semiconductor division employs craftsmen who produce two different electronic components: the new high-performance Super-chip and an older product called Okaychip. These two products have the following cost characteristics:


Annual overhead in the semiconductor division totals $400,000, all fixed. Due to the high skill level necessary for the craftsmen, the semiconductor division’s capacity is set at 50,000 hours per year.
One customer orders a maximum of 15,000 Super-chips per year, at a price of $60 per chip. If OVIC cannot meet this entire demand, the customer curtails its own production. The rest of the semiconductor division’s capacity is devoted to the Okay-chip, for which there is unlimited demand at $12 per chip.
The process-control division produces only one product, a process-control unit, with the following cost structure: 
■ Direct materials (circuit board): $60
■ Direct manufacturing labour (5 hours × $10): $50
Fixed overhead costs of the process-control division are $80,000 per year. The current market price for the control unit is $132 per unit.
A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the process-control unit. Using Super-chip would require an extra one hour of labour per control unit for a new total of six hours per control unit.

Required:
1. Calculate the contribution margin per hour of selling Super-chip and Okay-chip. If no transfers of Super-chip are made to the process-control division, how many Super-chips and Okay-chips should the semiconductor division sell? Show your computations.
2. The process-control division expects to sell 5,000 process-control units this year. From the viewpoint of OVIC as a whole, should 5,000 Super-chips be transferred to the process-control division to replace circuit boards? Show your computations.
3. If demand for the process-control unit is certain to be 5,000 units but itsprice is uncertain , what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for OVIC as a whole? (All other data are unchanged.)
4. If demand for the process-control unit is certain to be 12,000 units, but itsprice is uncertain , what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for OVIC as a whole? (All other data are unchanged.)

Annual overhead in the semiconductor division totals $400,000, all fixed. Due to the high skill level necessary for the craftsmen, the semiconductor division’s capacity is set at 50,000 hours per year. One customer orders a maximum of 15,000 Super-chips per year, at a price of $60 per chip. If OVIC cannot meet this entire demand, the customer curtails its own production. The rest of the semiconductor division’s capacity is devoted to the Okay-chip, for which there is unlimited demand at $12 per chip. The process-control division produces only one product, a process-control unit, with the following cost structure: ■ Direct materials (circuit board): $60 ■ Direct manufacturing labour (5 hours × $10): $50 Fixed overhead costs of the process-control division are $80,000 per year. The current market price for the control unit is $132 per unit. A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the process-control unit. Using Super-chip would require an extra one hour of labour per control unit for a new total of six hours per control unit. Required: 1. Calculate the contribution margin per hour of selling Super-chip and Okay-chip. If no transfers of Super-chip are made to the process-control division, how many Super-chips and Okay-chips should the semiconductor division sell? Show your computations. 2. The process-control division expects to sell 5,000 process-control units this year. From the viewpoint of OVIC as a whole, should 5,000 Super-chips be transferred to the process-control division to replace circuit boards? Show your computations. 3. If demand for the process-control unit is certain to be 5,000 units but itsprice is uncertain , what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for OVIC as a whole? (All other data are unchanged.) 4. If demand for the process-control unit is certain to be 12,000 units, but itsprice is uncertain , what should the transfer price of Super-chip be to ensure that the division managers’ actions maximize operating income for OVIC as a whole? (All other data are unchanged.)





Transcribed Image Text:

Super-chip Okay-chip Direct materials $ 2 $1 28 7 Direct manufacturing labour, 2 hours x $14; 0.5 hour × $14


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