Word Wizard is a publishing company with a number of differentbook lines. Each line has contracts with a number of differentauthors. The company also owns a printing operation called QuickPress. The book lines and the printing operation each operate as aseparate profit center. The printing operation earns revenue byprinting books by authors under contract with the book lines ownedby Word Wizard, as well as authors under contract with othercompanies. The printing operation bills out at $0.01 per page, anda typical book requires 500 pages of print. A manager from BusinessBooks, one of the Word Wizard�s book lines, has approached themanager of the printing operation offering to pay $0.007 per pagefor 1,500 copies of a 500-page book. The book line pays outsideprinters $0.009 per page. The printing operation's variable costper page is $0.004.
Determine whether the printing should be done internally orexternally, and the appropriate transfer price, under each of thefollowing situations.
A) The top management of Word Wizard believes that the printingoperation should alays do the printing for the company's authors.On a number of occasions, it has forced the printing operation tocancel jobs with outside customers in order to meet the needs ofits own lines. Discuss the pros and cons of this approach.
B) Calculate the change in contribution margin to each division,and to the company as a whole, if top management forces theprinting operation to accept the $0.007 per page transfer pricewhen it has no available capacity
Word Wizard is a publishing company with a number of differentbook lines. Each line has contracts with a number of differentauthors. The company also owns a printing operation called QuickPress. The book lines and the printing operation each operate as aseparate profit center. The printing operation earns revenue byprinting books by authors under contract with the book lines ownedby Word Wizard, as well as authors under contract with othercompanies. The printing operation bills out at $0.01 per page, anda typical book requires 500 pages of print. A manager from BusinessBooks, one of the Word Wizard�s book lines, has approached themanager of the printing operation offering to pay $0.007 per pagefor 1,500 copies of a 500-page book. The book line pays outsideprinters $0.009 per page. The printing operation's variable costper page is $0.004.
Determine whether the printing should be done internally orexternally, and the appropriate transfer price, under each of thefollowing situations.
A) The top management of Word Wizard believes that the printingoperation should alays do the printing for the company's authors.On a number of occasions, it has forced the printing operation tocancel jobs with outside customers in order to meet the needs ofits own lines. Discuss the pros and cons of this approach.
B) Calculate the change in contribution margin to each division,and to the company as a whole, if top management forces theprinting operation to accept the $0.007 per page transfer pricewhen it has no available capacity
