Lansing Electronics Inc. manufactures a variety of printers, scanners, and fax machines in its two divisions: the PSF Division and the Components Division. The Components Division pro- duces electronic components that can be used by the PSF Division. All the components this divi- sion produces can be sold to outside customers. However, from the beginning, nearly 90% of its output has been used internally. The current policy requires that all internal transfers of compo- nents be transferred at full cost.
Recently, Cam DeVonn, the chief executive officer of Lansing Electronics, decided to investi- gate the transfer pricing policy. He was concerned that the current method of pricing internal transfers might force decisions by divisional managers that would be suboptimal for the firm. As part of his inquiry, he gathered some information concerning Component Y34, which is used by the PSF Division in its production of a basic scanner, Model SC67.
The PSF Division sells 40,000 units of Model SC67 each year at a unit price of $42. Given current market conditions, this is the maximum price that the division can charge for Model SC67. The cost of manufacturing the scanner follows: