(Inicrdivisional transfers; deciding on alternatives) Amy Keeler, a manage¬ ment accountant, has recently been employed as controller in the Fashions Division of Deluxe Products, Inc. The company is organized on a divisional basis with considerable vertical integration.

Fashions Division makes several luggage products, including a slim leather portfolio. Its sales have been steady, and the marketing department expects continued strong demand. Keeler is looking for ways the Fashions Division can contain its costs and thus boost its earnings from future sales. She discovered that Fashions Division has always purchased its supply of high-quality tanned leather from another division of Deluxe Products, the LeatherWorks Division. LeatherWorks has been providing the 3 square feet of tanned leather needed for each portfolio for $9 per square foot.

Keeler wondered whether it might be possible to purchase Fashions’ leather needs at comparable quality from an external supplier at a lower price. Top management at Deluxe Products reluctantly agreed to allow Fash¬ ions Division to consider purchasing outside the company.

Fashions Division will need leather for 100,000 portfolios during the coming year. Its management has requested bids from several leather suppli¬ ers. The two best bids are $8 and $7 per square foot from Koenig and Thompson, respectively. Keeler has been informed that another subsidiary of Deluxe Products, Barrows Chemical, supplies Thompson the chemicals that are an essential ingredient of Thompson’s tanning process. Barrows Chemi¬ cal charges Thompson $2 for enough chemicals to prepare 3 square feet of leather. Barrows’ profit margin is 30 percent.

LeatherWorks Division wants to continue supplying Fashions’ leather needs at the same price per square foot as in the past. Tom Reed, Leather- Works’ controller, has made it clear that he believes Fashions should con¬ tinue to purchase all its needs from LeatherWorks to preserve LeatherWorks’ healthy profit margin of 40 percent of sales.

As Deluxe Products’ vice president of finance, you have called a meet¬ ing of the controllers of Fashions and LeatherWorks. Keeler is eager to ac¬ cept Thompson’s bid of $7. She points out that Fashions’ earnings will show a significant increase if the division can buy from Thompson.

Reed, however, wants Deluxe Products to keep the business within the company and suggests that you require Fashions to purchase its needs from LeatherWorks. He emphasizes that LeatherWorks’ profit margin should not be lost to the company. From whom should the Fashions Division buy the leather? Consider both Fashions’ desire to minimize its costs and Deluxe Products’ corporate goal of maximizing profit on a companywide basis.

(IMA adapted)

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