(Transfer prices; discussion) Biloxi Products Inc. is a decentralized company. Each division has its own sales force and production facilities and is oper¬ ated as an investment center. Top management uses return on investment (income divided by assets) for performance evaluation. Jackson Division has just been awarded a contract for a product that uses a component manufac¬ tured by Walters Division and by outside suppliers. Jackson used a cost fig¬ ure of $7.60 for the component when the bid was prepared for the new product. Walters supplied this cost figure in response to Jackson’s request for the average variable cost of the component.

Walters has an active sales force that is continually soliciting new cus¬ tomers, and sales of the component are expected to increase. Walters’s regu¬ lar selling price is $13 for the component that Jackson needs for the new product. Walters management has the following costs associated with the component:

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 sug¬ gestions 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, or • 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 atti¬ tude of Walters Division management toward intracompany business.
C. Is the negotiation of a price between the Jackson and Walters Divisions a satisfactory method to solve the transfer price problem? Explain your answer.

d. Should the corporate management of Biloxi Products Inc. become in¬ volved in this transfer controversy? Explain your answer.
(CMA adapted) LO.1

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Standard variable manufacturing cost Standard variable selling and distribution cost Standard fixed manufacturing cost Total $ 6.40 1.20 2.40 $10.00