Compute each of the suggested transfer prices for (a), (b),(c), and (d).2.Calculate the contribution margin ratios for both theAmarillo and Midland Divisions using the two transferprices mentioned in the case: $38.00 used in the originalbid, and $58.20 needed by Ella to carn her bonus. Whatconclusions do you draw from these calculations?3. Is the negotiation of a price between the Midland andAmarillo Divisions an appropriate method to determinea transfer price? Is it likely that negotiation will besuccessful?4.Should the corporate management of Texas Products becomeinvolved in this transfer controversy should negotiationsbetween the two division managers break down? Explain.
IMA EDUCATIONAL Case Journal Case Study Texas Products, Inc. Nialofas J. F 551.81" Snake College ofBasr'rms Th? University of Texas at Tyler INTRODUCTION Texas Products. Inc. is a decentralized company where each division is operated as an investment center and has its own production facilities and sales force (see Appendix for more information about transfer pricing). Division managers are paid well. including annual bonuses, and top management uses return on investment (ROI) to evaluate and reward the performance of its division managers. Two such divisions are the object of this case. The Midland Division has just won a contract for its recently developed product \"Millennium." One of the component parts used in the production of Millennium can be manufactured by the Amarillo Division and has an internal code name of \"Falcon;" however, a subcomponent functionally similar to Falcon can also be manufactured by outside providers. When bidding for the project, the manager of Midland Division, Luke Darth, asked Amarillo to provide the variable cost of the Falcon component and used the provided cost gure ($38.00) when preparing the Millennium bid. The Midland Division anticipates a total cost of $262.50 for the product (including the $38.00 cost of the Falcon component produced by the Amarillo Division) and won the contract with a bid of$362.50. which will he the Midland Division's revenue per unit sold. Variable manufacturing cost $100.00 {including $33 transfer price] Variable selling and distribution cost 31.50 Fixed manufacturing cost TOTAL COST (MILLENNIUM) m IMA EDUCATIONAL CASE JOURNAL The Association of . . '- Accountants and I l 1 1(1 Financial Professionals in Business ISSN 1940-204X The Amarillo Division's regular selling price for Falcon is $65.00 {to external customers). The sales force for Amarillo is actively pursuing new customers. and sales for Falcon are expected to increase. The Amarillo Division has the following costs associated with Falcon: Variable manufacturing cost $32.00 Variable selling and distribution cost 0.00 Fixed manufacturing cost TOTAL COST [FALCON] M Unfortunately. the managers of the two divisions have not yet been able to agree on a transfer price for Falcon. The results of the negotiation will be important in determining which of the division managers earns a bonus this year. Ella Vader, manager of the Amarillo Division, is irritated that information was obtained about the cost of the Falcon component part without her knowledge. But she is thankful that whoever asked for the information did not specically request \"variable manufacturing cost." as the $38.00 cost gure provided to the Midland Division includes $6.00 of variable selling and distribution costs, which will not be incurred for any sales to Midland. Ella knows that she will not earn a bonus this year if her Amarillo Division effectively \"gives" Falcon to Midland Division. which is what Amarillo would be doing if the transfer price is $38.00. She thinks that in order for her to earn an annual bonus this year. the transfer price for the component must be at least $58.20. which provides a 45% contribution margin ratio. But she has doubts that Luke Darth will be able to earn his annual bonus with a transfer price that high. VOL.11.NU.3, ART.1, SEPTEMBER 2018 2018|MA
