Slagle Corporation is a large manufacturing organization. Over the past several years, it has obtained an important component used in its production process exclusively from Harrison, Inc., a relatively small company in Topeka, Kansas. Harrison charges $90 per unit for this part:

Variable cost per unit	$40
Fixed cost assigned per unit	30
Markup	20
Total price	$90

In hopes of reducing manufacturing costs, Slagle purchases all of Harrisons outstanding common stock. This new subsidiary continues to sell merchandise to a number of outside customers, as well as to Slagle. Thus, for internal reporting purposes, Slagle views Harrison as a separate profit center.

A controversy has now arisen among company officials about the amount that Harrison should charge Slagle for each component. The administrator in charge of the subsidiary wants to continue the $90 price. He believes this figure best reflects the divisions profitability: If we are to be judged by our profits, why should we be punished for selling to our own parent company? If that occurs, my figures will look better if I forget Slagle as a customer and try to market my goods solely to outsiders.

In contrast, the vice president in charge of Slagles production wants the price set at variable cost, total cost, or some derivative of these numbers: We bought Harrison to bring our costs down. It only makes sense to reduce the transfer price; otherwise the benefits of acquiring this subsidiary are not apparent. I pushed the company to buy Harrison; if our operating results are not improved, I will get the blame.

In your initial post, answer the following questions:

• Will the decision about the transfer price affect consolidated net income?
• Which method would be easiest for the companys accountant to administer?
• As the companys accountant, what advice would you give to these officials?