11-3A - Transfer Pricing PhonyTel Inc. was a massive media company that controlled a cable company, a 4G wireless data network, and several other related businesses. PhonyTel Inc. was a highly decentralized organization, where managers were encouraged to make decisions that were most profitable for their own divisions. One of PhonyTel Inc's subsidiary businesses was PhonyTel Data (PD), an installer of data servers. Phony Tel Data's manager, Steve Frost, had a large job that would require the installation of two thousand servers. The request received 3 bids: One from PhonyTel Networking (PN), a subsidiary of PhonyTel Inc.; one from Little Guys Data (LGD); and one from Big Name Competitor (BNC). Details of the bids are below: . . . Company Bid (Per Notes server) PhonyTel Networking $1,800 The company would purchase the processors from PhonyTel Chips (a subsidiary of PhonyTel Inc.) The final product would be of a very high quality Little Guys Data $1,600 The company would purchase the processors from PhonyTel Chips (a subsidiary of PhonyTel Inc.) The final product would be of equal quality to that produced by PhonyTel Networking Big Name Competitor $1,550 The company would manufacture its own parts, The final product would be of equal quality to that They produced by Phony Tel Networking Frost was frustrated by the bids, and phoned Kianna Chang, the manager of PhonyTel Networking, "How on earth is it that the only internal bid is by far the highest! You're not anywhere near capacity, shouldn't you be cutting me a deal? You've got to drop below $1.550 or I'll buy from BNC. Chang replied, "Look, I understand where you're coming from, but I have margins to protect, I simply can't offer you a better deal. The bosses are stressing a focus on higher margins and higher average selling prices. I can't tell all my salespeople to pitch the high-end, only to kill the firm's just to make you guys look good." Frustrated, Frost called Teegan Bertuzzi, the CFO of the parent company. "C'll have a look at the issue". said Bertuzzi, and she noted the following details: Frustrated, Frost called Teegan Bertuzzi, the CFO of the parent company. "I'll have a look at the issue", said Bertuzzi, and she noted the following details: . Phony Tel Data would incur $300 in variable costs on top of its purchase price, and sell the installation for $2,400 per server. Phony Tel Networking's variable costs would be $1,400, and included the cost of the processors purchased from Phony Tel Chips. PhonyTel Chips sold this type of processor for $500. Their contribution margins were typically 20%. PhonyTel Chips had excess capacity. Required: a.) Give the dollar advantage or disadvantage of accepting each deal (for the parent company, Phony Tel Inc.) b.) What are Teegan Bertuzzi's options? What should she do? 5 . 11-3A - Transfer Pricing PhonyTel Inc. was a massive media company that controlled a cable company, a 4G wireless data network, and several other related businesses. PhonyTel Inc. was a highly decentralized organization, where managers were encouraged to make decisions that were most profitable for their own divisions. One of PhonyTel Inc's subsidiary businesses was PhonyTel Data (PD), an installer of data servers. Phony Tel Data's manager, Steve Frost, had a large job that would require the installation of two thousand servers. The request received 3 bids: One from PhonyTel Networking (PN), a subsidiary of PhonyTel Inc.; one from Little Guys Data (LGD); and one from Big Name Competitor (BNC). Details of the bids are below: . . . Company Bid (Per Notes server) PhonyTel Networking $1,800 The company would purchase the processors from PhonyTel Chips (a subsidiary of PhonyTel Inc.) The final product would be of a very high quality Little Guys Data $1,600 The company would purchase the processors from PhonyTel Chips (a subsidiary of PhonyTel Inc.) The final product would be of equal quality to that produced by PhonyTel Networking Big Name Competitor $1,550 The company would manufacture its own parts, The final product would be of equal quality to that They produced by Phony Tel Networking Frost was frustrated by the bids, and phoned Kianna Chang, the manager of PhonyTel Networking, "How on earth is it that the only internal bid is by far the highest! You're not anywhere near capacity, shouldn't you be cutting me a deal? You've got to drop below $1.550 or I'll buy from BNC. Chang replied, "Look, I understand where you're coming from, but I have margins to protect, I simply can't offer you a better deal. The bosses are stressing a focus on higher margins and higher average selling prices. I can't tell all my salespeople to pitch the high-end, only to kill the firm's just to make you guys look good." Frustrated, Frost called Teegan Bertuzzi, the CFO of the parent company. "C'll have a look at the issue". said Bertuzzi, and she noted the following details: Frustrated, Frost called Teegan Bertuzzi, the CFO of the parent company. "I'll have a look at the issue", said Bertuzzi, and she noted the following details: . Phony Tel Data would incur $300 in variable costs on top of its purchase price, and sell the installation for $2,400 per server. Phony Tel Networking's variable costs would be $1,400, and included the cost of the processors purchased from Phony Tel Chips. PhonyTel Chips sold this type of processor for $500. Their contribution margins were typically 20%. PhonyTel Chips had excess capacity. Required: a.) Give the dollar advantage or disadvantage of accepting each deal (for the parent company, Phony Tel Inc.) b.) What are Teegan Bertuzzi's options? What should she do? 5
