A consulting firm, TAC, is decentralized with 25 offices around the country. The headquarters is based in Vancouver, British Columbia.
Another operating division is located in Calgary. A subsidiary printing operation,
Kwik Print, is located in the headquarters building. Top management has indicated that they would like the Calgary office to use Kwik Print for printing reports. All charges are eventually billed to the client, but TAC was concerned about keeping such charges competitive.
Kwik Print charges the Calgary office the following amounts:

At this rate, Kwik Print sales have a 60 percent contribution margin to fixed overhead.
Outside bids for 100 copies of a 120-page report needed immediately have been

These three printers are located within a five kilometre radius of TAC Calgary and can have the reports ready in two 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 three to four days to get the copies from Kwik Print (because of the extra scheduling difficulties in delivery and pickup).
Quality control of Kwik Print is poor. Reports received in the past have had wrinkled pages and have occasionally been miscollated or had pages deleted. (In one circumstance an intracompany memorandum indicating TAC’s economic straits was inserted in a report. Fortunately, the Calgary office detected the error before the report was distributed to the clients.) 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 TAC Calgary, to which print shop would you give the business? Is this an optimal economic decision from the entire corporation’s point of view?
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 the goodwill of the client.
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 Kwik Print should be used.

Transcribed Image Text:

Photographing page for offset printing (a setup cost) Printing cost per page $0.25 0.014