Scenario:

Arya Print Products is a subsidiary of Stark Systems. Stark Systems is a multi-national information systems consulting firm. Arya has traditionally provided all of the promotional pamphlets, bound reports, and professional presentation materials used by all of the divisions within Stark Systems.

For the past three months, designers with Arya Print Products have been working with consultants from Sansa Consulting, another division of Stark Systems. This team has been working to design promotional materials that Sansa Consulting will distribute to past and potential clients. The designers for Arya Print Products have worked a total of 1,000 person-hours on this design task. Sansa Consulting has reimbursed Arya Print Products on a cost-plus basis ... the $30,000 labor cost of the designers (1,000 hours $30 per hour) plus a small profit markup of 10% for a total reimbursement of $33,000 ($30,000 + $3,000).

With the design completed, Sansa Consulting has asked for bids to do the actual production of the promotional materials. Sansa has received two bids.

From Arya Print Products $1,000,000

From Outside Print and Graphics 800,000

For the past year, Arya's operations have run, on average, at 60% of full capacity. The division manager of Arya Print Products reports that $1,000,000 is the market price of this job given the premium quality that her division produces. She also reports that she thinks the $800,000 bid from Outside Print and Graphics represents a one-time, low-ball bid from a low-quality producer. - Finally, the Arya manager estimates that her direct production cost for this job is $790,000, as follows: $400,000 for materials, $225,000 for labor, and $165,000 for direct overhead. [Arya would buy the materials for $400,000 from yet a third Stark Systems division, Brandon Raw Materials. The cost to Brandon of buying these materials would be $250,000, so Brandon would mark the materials up by $150,000 before selling them to Arya.]

Within Stark Systems, all division managers are evaluated based on the amount of segment margin generated by her or his division. Segment margin is defined as revenue minus variable cost minus direct fixed cost. A simple organization chart for Stark Systems is given below.

Arya Print Products: Transfer Pricing Arya Print Products is a subsidiary of Stark Systems. Stark Systems is a multi-national information systems consulting rm. Arya has traditionally provided all of the promotional pamphlets, bound reports, and professional presentation materials used by all of the divisions within Stark Systems. For the past three months, designers with Arya Print Products have been working with consultants from Sansa Consulting, another division of Stark Systems. This team has been working to design promotional materials that Sansa Consulting will distribute to past and potential clients. The designers for Arya Print Products have worked a total of 1,000 person-hours on this design task. Sansa Consulting has reimbursed Arya Print Products on a cost-plus basis . .. the $30,000 labor cost of the designers (1,000 hours x $30 per hour) plus a small prot markup of 10% for a total reimbursement of $33,000 ($30,000 + $3,000). With the design completed, Sansa Consulting has asked for bids to do the actual production of the promotional materials. Sansa has received two bids. From Arya Print Products $1,000,000 From Outside Print and Graphics 800,000 The division manager for Sansa Consulting wants to accept the $800,000 bid from Outside Print and Graphics which is not afliated with Stark Systems. The division manager of Arya Print Products has refused to lower her bid. For the past year, Arya's operations have run, on average, at 60% of full capacity. The division manager of Arya Print Products reports that $1,000,000 is the market price of this job given the premium quality that her division produces. She also reports that she thinks the $800,000 bid from Outside Print and Graphics represents a one-time, low-ball bid from a low-quality producer. Finally, the Arya manager estimates that her direct production cost for this job is $790,000, as follows: $400,000 for materials, $225,000 for labor, and $165,000 for direct overhead. [Arya would buy the materials for $400,000 from yet a third Stark Systems division, Brandon Raw Materials. The cost to Brandon of buying these materials would be $250,000, so Brandon would mark the materials up by $150,000 before selling them to Arya.] Within Stark Systems, all division managers are evaluated based on the amount of segment margin generated by her or his division. Segment margin is dened as revenue minus variable cost minus direct xed cost. A simple organization chart for Stark Systems is given below