Rowling Inc. is a decentralized company, and each investment center has its own sales force and production facilities. Top management uses return on investment (income divided by assets) for performance evaluation.

Potter Division has just been awarded a contract for a product that uses a component manufactured by Gondorf Division and by outside suppliers. Potter used a cost figure of $15.20 for the component when the bid was prepared for the new product. Gondorf supplied this cost figure in response to Potter's request for the average variable cost of the component.

Gondorf has an active sales force that is continually soliciting new customers, and sales of the component are expected to increase. Gondorf's regular selling price is $26 for the component that Potter needs for the new product. Gondorf has the following costs associated with the component:

Standard variable manufacturing cost .........$12.80

Standard variable selling and distribution cost ..... 2.40

Standard fixed manufacturing cost ......... 4.80

Total ......................$20.00

The two divisions have been unable to agree on a transfer price for the component.

Corporate management has never established a transfer price because interdivisional transactions have never occurred. The following suggestions have been made for the transfer price:

• Regular selling price

• Regular selling price less variable selling and distribution expenses

• Standard manufacturing cost plus 15 percent

• Standard variable manufacturing cost plus 20 percent

a. Compute each suggested transfer price.

b. Discuss the effect that each of the transfer prices might have on the attitude of Gondorf Division management toward intracompany business.

c. Is the negotiation of a price between the Potter and Gondorf Divisions a satisfactory method for solving the transfer price problem? Explain your answer.

d. Should the corporate management of Rowling Inc. become involved in this transfer controversy? Explain your answer.