Texas Products, Inc. is a decentralized company where each division is operated as an investment center and has its own production facilities and sales force (see Appendix for more information about transfer pricing). Division managers are paid well, including annual bonuses, and top management uses return on investment (ROI) to evaluate and reward the performance of its division managers. Two such divisions are the object of this case. The Midland Division has just won a contract for its recently developed product "Millennium." One of the component parts used in the production of Millennium can be manufactured by the Amarillo Division and has an internal code name of "Falcon;" however, a subcomponent functionally similar to Falcon can also be manufactured by outside providers.

When bidding for the project, the manager of Midland Division, Luke Darth, asked Amarillo to provide the variable cost of the Falcon component and used the provided cost figure ($38.00) when preparing the Millennium bid. The Midland Division anticipates a total cost of $262.50 for the product (including the $38.00 cost of the Falcon component produced by the Amarillo Division) and won the contract with a bid of $362.50, which