MBR Inc. consists of three divisions that were formerly three independent manufacturing

companies. Bader Corporation and Roper Company merged in 2016, and the merged corporation

acquired Mitchell Company in 2017. The name of the corporation was subsequently changed to

MBR Inc., and each company became a separate division retaining the name of its former

company.

The three divisions have operated as if they were still independent companies. Each division has

its own sales force and production facilities. Each division management is responsible for sales,

cost of operations, acquisition and financing of divisional assets, and working capital

management. The corporate management of MBR evaluates the performance of the divisions and

division management on the basis of return on investment.

Mitchell Division has just been awarded a contract for a product that uses a component

manufactured by the Roper Division and also by outside suppliers. Mitchell used a cost figure of

$3.80 for the component manufactured by Roper in preparing its bid for the new product. Roper

supplied this cost figure in response to Mitchells request for the average variable cost of the

component; it represents the standard variable manufacturing cost and variable selling and

distribution expenses.

Roper has an active sales force that is continually soliciting new prospects. Ropers

regular selling price for the component Mitchell needs for the new product is $6.50. Sales of this

component are expected to increase. The Roper management has indicated, however, that it

could supply Mitchell the required quantities of the component at the regular selling price less

variable selling and distribution expenses. Mitchells management has responded by offering to

pay standard variable manufacturing cost plus 20 percent.

The two divisions have been unable to agree on a transfer price. Corporate management

has never established a transfer-pricing policy because interdivisional transactions have never

occurred. As a compromise, the corporate vice president of finance suggested a price equal to the

standard full manufacturing cost (i.e., no selling and distribution expenses) plus a 15 percent

markup. The two division managers have also rejected this price because each considered it

grossly unfair.

The unit cost structure for the Roper component and the three suggested prices follow.

Standard variable manufacturing cost .................. 3.20$

Standard fixed manufacturing cost ........................ 1.20$

variable selling and distribution expenses ............. 0.60$

total: 5.00$

regular selling price less variable selling and distributive expenses (6.50$ - 0.60$) ...... 5.90$

standard full manufacturing cost plus 15% (4.40$ x 1.15) .............................................. 5.06$

variable manufacturing plus 20% (3.20$ x 1.20) ............................................................. 3.84$

Required

a. What should be the attitude of the Roper Divisions management toward the three proposed

prices?

b. Is the negotiation of a price between the Mitchell and Roper Divisions a satisfactory method

of solving the transfer-pricing problem? Explain your answer.

c. Should the corporate management of MBR Inc. become involved in this transfer-price

controversy? Explain your answer.