(Interdivisional transfers; deciding on alternatives) Alice Appleby, a management Cases accountant, has recently been employed as controller in the Designer Division of Global Traveler, Inc. The company is organized on a divisional basis with considerable vertical integration.

Designer Division makes several luggage products, including a slim leather portfolio. Sales of the portfolio have been steady, and the marketing department expects continued strong demand. Alice is looking for ways the Designer Divi¬ sion can contain its costs and thus boost its earnings from future sales. She discovered that the Designer Division has always purchased its supply of high- quality tanned leather from another division of Global Traveler, the Guissepi Division. Guissepi Division has been providing the three square feet of tanned leather needed for each portfolio for $9 per square foot.

Alice wondered whether it might be possible to purchase Designer’s leather needs from a supplier other than Guissepi at a lower price for comparable qual¬ ity. Top management at Global Traveler reluctantly agreed to allow the De¬ signer Division to consider purchasing outside the company.

The Designer Division will need leather for 100,000 portfolios during the coming year. Designer management has requested bids from several leather sup¬ pliers. The two best bids are $8 and $7 per square foot from Keonig and Thomp¬ son, respectively. Alice has been informed that another subsidiary of Global Traveler, Ridley Chemical, supplies Thompson with chemicals that have been an essential ingredient of the tanning process for Thompson. Ridley Chemical charges Thompson $2 for enough chemicals to prepare three square feet of leather. Ridley’s profit margin is 30 percent.

The Guissepi Division wants to continue supplying Designer’s leather needs at the same price per square foot as in the past. Jim Scott, Guissepi’s controller, has made it clear that he believes Designer should continue to purchase all its needs from Guissepi to preserve Guissepi’s healthy profit margin of 40 percent of sales.

You, as Global Traveler’s vice president of finance, have called a meeting of the controllers of Designer and Guissepi. Alice is eager to accept Thompson’s bid of $7. She points out that Designer’s earnings will show a significant increase if the division can buy from Thompson.

Jim Scott, however, wants Global to keep the business within the company and suggests that you require Designer to purchase its needs from Guissepi. Fie emphasizes that Guissepi’s profit margin should not be lost to the company.

From whom should the Designer Division buy the leather? Consider both Designer’s desire to minimize its costs and Global’s corporate goal of maximiz¬ ing profit on a companywide basis.

(IMA adapted)

CHAPTER 19 Responsibility Accounting and Transfer Pricing in Decentralized Organizations 919