Segment Reporting: Allegiance Corp. has four operating divisions: (1) airline; (2) hotel; (3) auto rental; and, (4) travel services. Each division is a separate segment for financial-reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in millions):

The airline participated in a frequent stayer program with the hotel chain. During the past year, the airline reported that it traded hotel award coupons for travel which had a retail value of $26 million, assuming that the travel was redeemed at full airline fares. The auto rental division offered 20 percent discounts to Allegiance's airline passengers and hotel guests. These discounts to airline passengers were estimated to have a retail value of $7 million. Allegiance hotel guests redeemed $3 million in auto rental discount coupons. Allegiance hotels provided rooms for flight crews on Alle- giance's airline. The value of the rooms for the year was $13 million. The travel services division booked flights on Allegiance's airline. This service was valued at $4 million for the year. This service for intracompany hotel bookings was valued at $2 million and for intracompany auto rentals at $1 million. While preparing all of these data for financial statement presentation, the hotel division's controller stated that the value of the airline coupons should be based on the differential and opportunity costs of the travel awards, not on the full fare for the tickets issued. This argument was suppported because award travel is usually allo- cated to seats that would otherwise be empty or contains restrictions similar to those on discount tickets. If the differential and opportunity costs were used for this transfer price, the value would be $5 million instead of $26 million. The airline controller made a similar argument concerning the auto rental discount coupons. If the differential cost basis were used for the auto rental coupons, the transfer price would be $1 million instead of the $7 million above. Allegiance reports assets in each segment as follows:

Required:

a. Using the retail values for transfer pricing for segment reporting purposes, what are the operating profits for each division of Allegiance Corp.?

b. What are the operating profits for each division of Allegiance Corp. using the differential cost basis for pricing transfers?

c. Rank each division by return on investment using the transfer pricing method in a., above, as well as using the transfer pricing method in b.. above. What difference does the transfer pricing system have on the rankings?

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Auto Airline Hotel Rental Revenues $245 $106 $89 Costs 157 71 66 Travel Services $32 30