TAA, a multidivisional telecommunications corporation, has two completely independent profit centers considering a transfer. TAA subsidiaries operates within a decentralized environment. TAA will not dictate transfers or impose a transfer pricing policy on the divisions. They must be free to decide whether they should transfer, and if so, they must negotiate a transfer price. Further, the TAA reward system must be based on the total divisional profits reported by the profit centers. One of TAA's divisions; Southwestern Ringer, produces telephone sets that it sells for $30 each. The standard absorptive manufacturing cost is $24, which includes $6 per unit in fixed overhead. The fixed overhead is allocated over its annual sales forecast of 50,000 telephone sets its maximum production capacity is 75,000, sets annually. Another division, Northeastern Tell, can use the telephone sets in an answering machine-telephone-radio product it markets As an alternative to buying telephone sets from Southwestern, Northeastern can enter into a contract for the 20,000 sets needed from a Mexican company, OLA, Inc. OLA has quoted a price of $25 per set for the same quality telephone. Required: a. Determine whether a transfer should take place between Southwestern Ringer and Northeastern Tell. b. Should a transfer occur if Southwestern can increase sales and production volumes to 75,000 sets annually by dropping the sales price to $27.50? c. Northeastern Tell wants its name imprinted on the telephene set. Its Mexican supplier has quoted a price of $31.00 per set. Southwestern Ringer will have to buy a stamping machine at a net cost of $20,000. Southwestern no longer can produce at full capacity by dropping its sales price to $27.50; so the manager has abandoned that idea. Determine whether there should now be a transfer. What transfer price will result in the managers benefiting equally from the transfer?
TAA, a multidivisional telecommunications corporation, has two completely independent profit centers considering a transfer. TAA subsidiaries operates within a decentralized environment. TAA will not dictate transfers or impose a transfer pricing policy on the divisions. They must be free to decide whether they should transfer, and if so, they must negotiate a transfer price. Further, the TAA reward system must be based on the total divisional profits reported by the profit centers. One of TAA's divisions; Southwestern Ringer, produces telephone sets that it sells for $30 each. The standard absorptive
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