P-4A
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 proï¬t center. The printing operation earns revenue byprinting books by authors under contract with the book lines ownedby Word Wizard, as well as authors under con-tract with othercompanies. The printing operation bills out at $0.01 per page, anda typi-cal book requires 500 pages of print. A manager fromBusiness Books, one of the Word Wizardâs book lines, has approachedthe manager of the printing operation offering to pay $0.007 perpage for 1,500 copies of a 500-page book. The book line paysoutside printers $0.009 per page. The printing operationâs variablecost per page is $0.004.
Instructions Determine whether the printing should be doneinternally or externally, and the appropri-ate transfer price,under each of the following situations.
(a) Assume that the printing operation is booked solid for thenext 2 years, and it would have to cancel an obligation with anoutside customer in order to meet the needs of the internaldivision.
(b) Assume that the printing operation has availablecapacity.
(c) The top management of Word Wizard believes that the printingoperation should always do the printing for the companyâs 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.
(d) Calculate the change in contribution margin to eachdivision, and to the company as a whole, if top management forcesthe printing operation to accept the $0.007 per page transfer pricewhen it has no available capacity.