laboratory tests that had been purchased from Bright Case 15.1: Bright Sky Hospital Sky Hospital's Laboratory Division, another profit Key concept: Determining transfer pricing policy (CBC) tests, which the Surgical Care Division billed out for $15 per test. This test was actually performed by 1. arcus Olson, MD, was director of the Laboratory Division, which charged the Surgical Surgical Care Division of Bright Sky was intended to cover time spent by nurses, supplies Hospital. The hospital had recently needed for the CBC, and administrative time. implemented responsibility accounting, and Dr. Dr. Olson made a few phone calls and found that he Olson's division was now a profit center. Responsibility could purchase the CBC from an outside lab for $7. accounting guidelines for directors indicated that they He then called the director of Bright Sky's Laboratory should purchase services from other units in the Division, Misty Dawn, to discuss the apparently "high" hospital if possible. price for the CBC and to request that Ms. Dawn meet the Dr. Olson was reviewing the latest monthly budget $7 external price. and became concerned with the cost of various Ms. Dawn responded that the $10 price consisted of would schedule a meeting with Mr. Terrific to discuss $5 of variable costs, $4 of fixed costs, and a $1 profit the problem. margin. She stated that her division was operating After hearing from both parties, Mr. Terrific knew under a very tight budget and declined to lower the that the conflict would not go away without his price. She said, "If I lower the price, then my division's intervention. He was concerned about the implications net income will be lower, and I won't get my bonus of his decision for other profit center departments in money this year." the hospital. Dr. Olson responded, "With the volume of testing we send to your lab and your high prices, there goes my Assignment and Question bonus money this year. I won't be robbed. I will just go ahead and use outside labs." 1. In the table below, calculate each profit center's Ms. Dawn then stated that she would lodge a financial performance under the two options, complaint with Bright Sky Hospital's financial vice source internally or source externally. president, Tom Terrific, if Dr. Olson carried through with his threat to outsource. Dr. Olson then said he (Hint: Consider both short-run and long-run implications.) 2. What should Mr. Terrific do about the price of the CBC