The Northwest Division of Kebalo Electric produces hydroelectric power. The plant produces three types of electric power. The power plant has seven machines that can harvest hydroelectric power on a continuous process such that the capacity of the plant is 5,000 machine hours per month. The total fixed cost of those machines is a $10,000 per month. Kebalo Electric allocates the fixed cost of the machines at a normal rate, where the normal rate is based on the capacity of machine hours. Energy type “Standard” is not easily stored, energy type “Super” is easier to store and send to more remote regions, and energy type “Bad” has no external market. However, energy type “Bad” is easily transferred to the Southwest Division of Kebalo Electric where it can be transferred into a marketable energy source by the Southwest Division. The Southwest Division can further process the “Bad” energy at a variable cost of $1 per unit and sell it for $5 per unit. The demand for this additionally processed power is infinite.

The selling price, variable cost, and machine hours required for the energy types from the Northwest Division are as follows (note: a unit of energy is a kilowatt-hour):

“Standard” “Super” “Bad”

Selling Price/unit 3.5 6 –

Variable Cost/unit 1 2 3

Machine hours/unit 0.25 0.5 1

The monthly external demand for each energy source in units (kilowatt-hours) is as follows:

“Standard” “Super” “Bad”

Demand in units (kilowatthours)

1,500 3,000 0

  1. What is the normal rate of the machine cost?
  2. $1 / hour
  3. $2 / hour
  4. $1 / unit
  5. $2 / unit
  6. Which product brings the greatest contribution margin per kilowatt hour to the firm?
  7. super
  8. standard
  9. bad
  10. Which product brings the greatest contribution margin per machine hour to the firm?
  11. super
  12. standard
  13. bad
  14. What is the optimal transfer pricing schedule for the Northwest Division to charge the Southwest Division for “Bad” energy (note: there are three transfer prices at three separate intervals)?
  15. 0-3, 125 units the optimal transfer price is =
  16. 3,126 – 4,625 units the transfer price is =
  17. 4,626 – 5,000 units the transfer price is =
  18. What is the optimal transfer price (from the perspective of Kebalo Electric as a whole) if the Southwest Division resides in a region that is regulated by a tax rate of 35%, whereas the tax rate for the Northwest Division is only 15%? (Assume that any of the following transfer prices are within the range that is acceptable by the taxing authorities).
  19. $2.50 / unit
  20. $3 / unit
  21. $4 / unit
  22. $11 / unit
  23. $13 / unit
  24. Assume that the firm’s management forces the Northwest division to transfer 4,000 kilowatt-hours of “Bad” power to the Southwest division at $4.00 per kilowatt-hour? What is the Total Contribution Margin to the firm as whole for the 4,000 kilowatt-hours of power sold by the Southwest Division? (note: the Contribution Margin does not include the fixed cost)
  25. What is the Total Contribution Margin to the firm as whole if firm management allows the Northwest Division to act in a way that maximizes their profitability by transferring kilowatt-hours of power to the Southwest Division at the “optimal transfer price” that we learned about in class? (note: the Contribution Margin does not include the fixed cost).
  26. What is the total cost to the firm as a whole (in terms of lost contribution margin) if the firm’s management forces the Northwest division to transfer 4,000 kilowatt-hours of “Bad” power to the Southwest division at $4.00 per kilowatt-hour?