case3 - CASE 3 1. Several different views are likely to...

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© 2008 For Instructor Use Only Case 3-1 CASE 3 1. Several different views are likely to surface. Below are representative responses: Now you have a much better understanding of Mr. Burns’ situation and realize that finding a good solution rests on setting the transfer price so that: (1) Wall Décor generates the highest rate of return possible, and (2) the transfer price to each store must be reasonable according to each store’s external market conditions. Essentially, Mr. Burns must keep everyone focused on the success of the overall company. His biggest fear is that the business units will take a narrow focus and be concerned only about their individual situation and thus hurt the overall company profits. Mr. Burns’ greatest problem is to keep Wall Décor and the individual stores working together to maximize the profit of the overall company and remain innovative. If not, Wall Décor will seek to sell to competitors in an attempt to increase its return on investment. The result is that store competitors will be able to sell high-quality framed print items and increase competitive pressures on Greetings stores. If the price of framed prints gets too high, store managers will seek different suppliers. This could hurt Wall Décor because it could be left with excess capacity. Setting the transfer price so both parties to the transaction win is a challenging task. If leadership continues to use a straight cost-plus approach, it may lose store sales, and Wall Décor will not meet its required rate of return. If leadership sets the transfer price at market price, it may also lose store sales because of a lost competitive position. Thus, the transfer price must be flexible, and all must benefit and earn a fair return.
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© 2008 For Instructor Use Only Case 3-2 CASE 3 (Continued) 2. (a) Profits under original transfer price
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This note was uploaded on 12/12/2009 for the course ACCT 2102 taught by Professor Constable,d during the Fall '08 term at Georgia Perimeter.

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case3 - CASE 3 1. Several different views are likely to...

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