WHAT PRICE SHOULD WE CHARGE OURSELVES?

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:

Table Summary: Table has $2$ columns; Column $1$ lists account statements, column $2$ lists dollar values.

Variable cost per unit $$40$

Fixed cost assigned per unit $30$

Markup $20$

Total price $$90$

In hope of reducing manufacturing costs, Slagle purchases all of Harrison$$s 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 $$90$ price. He believes this figure best reflects the division$$s 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 Slagle$$s production wants the price set at variable cost, total cost, or some derivative of these numbers. $$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.$$

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