Hotel California blossomed from a small hotel in Los Angeles, California founded in 1971 to an organization with several hundred locations. As the hotel chain spread across the country, so did the services provided by the organization. Along with these services emerged separate divisions within the organization. Among them was the Events Division, headed by Joe Walsh, which developed and managed a number of music festivals. Another was the Housing Division, headed by Glenn Frey, which operated the Hotel California chain of hotels; its facilities were used both by Hotel California and by other organizations. A third was the Produce Division, which operated a cattle, poultry, and produce farm. Don Henley originally took the farm as a solo project, but after some pink champagne on ice brought the farm into the Hotel California organization.

Since Glenn Frey, one of the founders of Hotel California passed away, the organization has struggled. Deacon Frey, his son, took over his father's responsibilities of tuning the Housing Division in 2017. Many believe that Deacon is not up to the task and unable to perform at the level of his father. Indeed the performance of the Housing Division has not been good recently. After looking at performance of the housing division, Deacon mandated that his sales team stop shaving their bids and to bid full-cost quotations.

Hotel California evaluates each division and divisional manager independently. The financial objective of each is to provide a profit margin. Senior management had been working to gain eective results from a policy of decentralizing responsibility and authority for all decisions except those relating to overall association policy. The association's senior ocials believed that in the past few years the concept of decentralization had been successfully applied and that the association's financial position had improved.

The Events Division had developed a three-day music festival that it planned to oer in several locations throughout the year. The music festival would be near a Hotel California location in each stop. Deacon Frey had spent many hours with the Joe Walsh and the other members of the Events Division in working on these plans.

When all the plans were completed, the Events Division asked for bids from the Housing Division and from two outside companies. Each division manager was normally free to buy from whatever supplier he wished; and, even on sales within the company, divisions were expected to meet the going market price if they wanted the business.

During this period, the profit margins of hotels and other conference facilities were being squeezed. Because Hotel California did not run music festivals steadily throughout the year, many of Housing's sales were made to outside customers. If Housing got the order from the Events Division, it would buy much of its raw food from the Hotel California Produce Division. About 70 percent of Housing's out-of-pocket cost of $400 for the conference represented the cost of raw food purchased from the Produce Division. Though the Produce Division had excess capacity, it quoted the market price, which had not noticeably weakened as a result of the oversupply. The out-of-pocket costs for Don Henley and the produce division were about 60 percent of the selling price.

The Events Division received bids of $480 a participant from the Housing Division of Hotel California, $430 a participant from Desperado Hotel, and $432 a participant from Witchy Hotel. To sweeten the deal, Witchy oered to buy raw food at a price equivalent to $90 a participant from Don Henley and the Hotel California Produce Division. The out-of-pocket costs for Don Henley and the produce division were about 60 percent of the selling price. So this would provide a margin of $36 per participant if they were to accept the Witchy Hotel bid. Joe Walsh, manager of the Events Division, was furious with Frey, the new kid in town, and the Housing Division. "Music festivals are already very expensive for participants. We can not pass on higher costs to the participants through high ticket prices. How can we be expected to show a decent margin if we have to buy our accommodations at more than 10 percent over the going market?"

Mr. Frey had not been living life in the fast lane. In fact, over the past few months the Housing Division has been operating at below capacity, with several hotels operating well below capacity during music festival season. It seemed odd to the executive team of Hotel California that Mr. Frey would add the full 20 percent overhead and margin to his out-of- pocket costs when bidding. When asked about this, Mr. Frey's answer was, "If I were to price this conference any lower than $480 a participant, I'd be countermanding my order of last month for our marketing organization to stop shaving their bids and to bid full-cost. I've been trying for weeks to improve the quality of our business, and, if I turn around now and accept this at $430 or $450 or something less than $480, I'll be tearing down this program I've been working so hard to build up. The division can't very well accomplish its objective by putting in bids that don't even cover a fair share of overhead costs, let alone give us a profit margin. If we were to do that, we might as well let guests check out any time they like, even if they never leave!"

He went on to say that having helped in the planning for the music festival, and having received no compensation for his time spent on that eort, he felt entitled to a good markup on the use of his facilities. Otherwise he is just a victim of love.

The executive team knows that in the absence of specific orders from top management, Mr. Walsh will accept the lowest bid, which is that of Desperado Hotel for $430. However, it would be possible for senior management to order the acceptance of another bid if the situation warranted such action. The executive gathered for a feast to determine what actions to take.

Which bid is in the bestinterest of the HotelCalifornia organization as awhole. That is, which bid should Joe Walsh accept if acting in the best interest of the organization as whole?

Discuss how the transfer pricing policy has contributed to this controversy and suggest a solution to a transfer pricing policy that will help alleviate controversies like this in the future.