You are the manager of PasadoBa Division of the Delikado Company. Your division’s main product is the Product81 which sells to its regular customers for P7.50 each. Product81 has a variable manufacturing cost of P4.25. Currently, the division is operating at its capacity. The manager of SureNa Division has asked you to supply them of Product81 for only P5 each. SureNa Division will use the Product81 to produce Product2ndSem and sell to large multinational companies. Furthermore, the SureNa Dvision is operating at 50% capacity. The following is the breakdown of costs of Product2ndSem:
Purchased from outside supplier............................................... P22.50
Product81 from PasadoBa Division................................................. 5.00
Other variable cost ........... 14.00
Fixed overhead and administration ...... 8.00
Total cost per brake unit ............. P49.50
Although the P5 price for the Product81 represents a discounted regular P7.50 price, the manager of the SureNa Division believes that the price scheme is necessary if his division is to get the contract in supplying large multinational companies. He has heard through an “insider” that one of the biggest prospective customer plans to reject his bid if it is more than P50 per unit. Furthermore, if the SureNa Division will be forced to buy from the outside supplier, it will either not get the contract or it will suffer loss at a time when it is already operating at only its current capacity. Product2ndSem’s manager argues that price concession is peremptory to the financial performance of both his division and the company as as whole. In addition, Delikado Company uses return on investment (ROI) to measure divisional performance.
Requirement:
1. On your perspective as the manager of PasadoBa Division, would you agree that your division supply the Product81 to the SureNa Division for P5 each as requested? Show all computations, and defend your answer.
2. On a company-wide perspective, would it be profitable should the transfer takes place if the Product2ndSem can be sold for P50? Show all computations, and defend your answer.
3. Based on what you have learned, should it be possible for the two managers to agree to a transfer price in this particular situation? Why or why not? Defend your answer. Please take note that if your answer is yes, indicate the range would that transfer price lie?
4.As a management accountant of the company and not as divisonal manager, what are the behavior problems from the organization as a whole and as managers that you found in this situation and what professional advice would you give the executives to rectify the situation?