A law firm, Arno Legal Services, is decentralized with 25 offices around the state of California. The headquarters is based in San Francisco. Another operating division is located in San Jose, 50 miles away. A subsidiary printing operation, ArnoPrint, is located in the headquarters building. Top management has indicated the desirability of the San Jose office using ArnoPrint for printing reports. All charges are eventually billed to the client, but Arno Legal Services was concerned about keeping such charges competitive.

ArnoPrint charges San Jose the following:

Photographing page for offset printing (a setup cost) … $.200

Printing cost per page …………………………………… 0.02

At this rate, ArnoPrint sales have a 50% contribution margin to fixed overhead.

Outside bids for 250 copies of a 180-page report needed immediately have been as follows:

Print 4U ……… $942.00

Jiffy Press ……. 918.25

Kustom Print … 923.50

These three printers are located within a 5-mile radius of Arno Legal Services’ San Jose office and can have the reports ready in 2 days. A messenger would have to be sent to drop off the original and pick up the copies. The messenger usually goes to headquarters, but in the past, special trips have been required to deliver the original or pick up the copies. It takes 3–4 days to get the copies from ArnoPrint (because of the extra scheduling difficulties in delivery and pickup).

Quality control at ArnoPrint is poor. Reports received in the past have contained wrinkled pages, have occasionally been mis-collated, or have had pages deleted altogether. (In one instance, an intra-company memorandum including the San Jose Office’s financial performance statistics was inserted in a report prepared for an outside client. Fortunately, the San Jose office detected the error before the report was distributed to the client.) The degree of quality control in the three outside print shops is unknown.

(Although the differences in costs may seem immaterial in this case, regard the numbers as significant for purposes of focusing on the key issues.)

1. If you were the decision maker at the San Jose office of Arno Legal Services, to which print shop would you give the business? Is this an optimal economic decision from the entire organization’s viewpoint?

2. What would be the ideal transfer price in this case, if based only on economic considerations?

3. Time is an important factor in maintaining client goodwill. There is potential return business from this client. Given this perspective, what might be the optimal decision for the company?

4. Comment on the wisdom of top management in indicating that ArnoPrint should be used.