Managerial Accounting, Ethics Case 2

Read the following entry called, "Transfer Price Among Divisions" and then answer the questions.

Your answer should be supported by an example within the conversation.

Transfer Price Among Divisions

Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and external customers. The company's X-ray Division uses semiconductors as a component in its final product and is evaluating whether to purchase them from the Semiconductor Division or from an external supplier. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took place between Dave and Howard:

Dave:I hear you are having problems selling semiconductors out of your division. Maybe I can help.

Howard:You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year, we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity? After all, we are part of the same company.

Dave:What kind of price could you give me?

Howard:Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $100 for 100 semiconductors.

Dave:I'm not so sure we can swing that. I was expecting a price break from a "sister" division.

Howard:Hey, I can only take this "sister" stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firmmarket price. After all, it's only fairthat's what you would have to pay from an external supplier.

Dave:Fair or not, I think we'll pass. Sorry we couldn't have helped.

Question:

1. Is Dave behaving unethically by trying to force the Semiconductor Division into a price break?
2. Comment on Howard's reaction and decision to not give a price break to a their sister division. What do you think is fair in this situation?