Q: The Robo Division, a decentralized division of GMTIndustries, has been approached to submit a bid for a potentialproject for the RSP Company. Robo Division has been informedby RSP that they will not consider bids over $8,000,000. RoboDivision purchases its materials from the Cross Division of GMTIndustries. There would be no additional fixed costs for eitherthe Robo or Cross Divisions. Information regarding this projectis as follows.DescriptionCross divisionRobo divisionV.C$1,500,000$4,800,000Transfer price3,700,0008,000,000If Robo Division submits a bid for $8,000,000, the amount ofC.M recognized by the Robo Division and GMT Industries,respectively, isA. $(500,000) and $1,700,000 B. $3,200,000 and $(500,000(C. $(500,000) and $(2,000,000) D. $3,200,000 and $1,700.000Answer (A) is correct:C.M recognized by Robo = $8,000,000 – ($3,700,000 +$4,800,000) = -$500,000C.M recognized by GMT company = $8,000,000 – ($1,500,000 +$4,800,000) = $1,700,000Essay: ARO Enterprises was formed by the merger of Andersen,Rolvaag and Ouie Corporations. Its three divisions retain thenames of the former companies and operate with completeautonomy. Corporate management evaluates the divisions anddivision management according to return on investment (ROI)The Rolvaag and Ouie divisions are currently negotiating atransfer price for a component that Ouie manufactures andRolvaag needs. Ouie which sells the component already into amarket that it expects to grow rapidly currently has excesscapacity Rolvaag could buy the component from othersuppliers. Three transfer prices are under consideration: •Rolvaag has bid $3.84 for the component, which is Ouie’sstandard variable manufacturing cost plus a 20% markup •Ouie has offered the component to Rolvaag at $5.90, which s itsregular selling price in the marketplace)$6.50(minus variable selling and distribution expenses. • AROmanagement, which has no established policy on transferpricing. Has offered the compromise price of $5.06 which is thestandard full manufacturing cost plus 15% Both the Ouie andRolvaag divisions have rejected the compromise price. Refer tothe pricing chart for a summary of this information.♥Regularselling price $6.50♥Standard variable manufacturing cost$3.20♥Standard full manufacturing cost $4.40♥Variableselling and distribution expenses 0.60♥Standard variablemanufacturing cost plus 20% ($3.20 × 1.20) = $3.84♥Regularselling price less variable selling and distribution expenses($6.50 – $0.60) = $5.90 Standard full manufacturing cost plus15% ($4.40 × 1.15) $5.06
Required 1. What effect might each of the three proposed priceshave on the Ouie division management’s attitude toward intra-company business? 2. Would a negotiation of a price betweenOuie and Rolvaag be a satisfactory method to establish atransfer price in this situation? Explain your decision. 3. ShouldARO corporate management become involved in resolving thistransfer price controversy? Explain your decision.
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Term
Spring
Professor
Mr.Mis
Tags
Stark Company
