Optically makes two kinds of products: lenses and swimming goggles in divisions P and Q respectively. P is an input for Q and two units of P are needed to make one unit of Q. The following data is given to you for a (standard) period :

P Q

/unit /unit

Direct Materials 2 2,50 (excl. P)

Direct Labour 3 3,50

Variable Overhead 1 2

External Demand (units) 3.000 3.000

Capacity (units 7.000 2.500

Selling Price (per unit, outside) 10 41

If Q buys lenses from outside, it has the following costs:

For order quantity 2,499 or less 9 per unit for the entire quantity ordered

For order quantity 2,500 5,000 8 per unit for the entire quantity ordered

For order quantity more than 5,000 7 per unit for the entire quantity ordered

Required:

Q1- Analyze the situation from the point of view of both PROFIT CENTERS P and Q and assess whether and how an internal transfer price for lenses emerges. Calculate the transfer (or at least the negotiation interval).

Q2 - What is the role of the CEO if an internal transfer price does not arise automatically?

Q3- Would changing the architecture (changing the decision rights) by making either P and/or Q e.g. a cost or a revenue center change the outcome to the benefit of the company?

The purpose of this simple exercise is to discuss the managerial consequences of the allocation of decision rights, to define what performance (management) entails in this situation and, most importantly, to show executive MBA students that when the computational, accounting calculations come to table, these are not the solution to the management problems (in fact: they are only the start of the management discussions).