The Harley Davidson Company (“HD”) is a renowned motor cycle manufacturer. For efficient operations, the company is divisionalised into two divisions. The Bikes division (“Bikes”) is responsible for assembling motorbikes and selling them to the final market, while the parts division (“Parts”) is responsible for manufacturing parts that are needed for motorbike assembling. It has been in the history of HD to allow divisional managers to make decisions pertaining their operations except that the Head Office made it a policy that the two divisions should first do business with each other before engaging any external customers. Bikes uses catalytic convertors (“convertors”) for the manufacturing of motorbikes that are manufactured by Parts. Under the current policy, Bikes should buy all convertors from Parts, and Parts should first consider selling convertors to Bikes before selling outside. At a recent meeting, it has been discussed that the Head Office interference is frustrating the efforts of the divisional managers and as a result, the Head Office should remove the prescription of requiring the two divisions to first do business with each other but rather to allow them to make all decisions in relation to their divisions without head office interference. This include deciding where to buy and where to sell. The following information relates to the two divisions for the forth coming period: Bikes: 17 500 convertors will be required. External manufacturers of the same convertor are selling it for $400 per unit. The external convertors are of the same quality and conformance as the ones manufactured by parts. Parts: The following had been forecast for the parts division for the forth coming period: budgeted capacity for the fourth coming period 30,000 convertors selling price per convertor (to external customers) N$425 variable costs per convertor (sold to external customers) N$385 If Parts sells to Bikes, the variable cost per convertor will be less by N$15 which is the transport cost that Parts will not incur by selling inside. Parts’s external customers for the convertors will require a maximum of 15 000 convertors for the forth coming period. required: a.) In light of changing their current policy, calculate how many convertors Parts should supply to Bikes in order to be goal congruent? b.)Determine the transfer price of these convertors and offer advice to the Head Office of HD that is deemed necessary?
Question 1
The Harley Davidson Company (“HD”) is a renowned motor cycle manufacturer. For efficient
operations, the company is divisionalised into two divisions. The Bikes division (“Bikes”) is
responsible for assembling motorbikes and selling them to the final market, while the parts division
(“Parts”) is responsible for manufacturing parts that are needed for motorbike assembling.
It has been in the history of HD to allow divisional managers to make decisions pertaining their
operations except that the Head Office made it a policy that the two divisions should first do
business with each other before engaging any external customers. Bikes uses catalytic convertors
(“convertors”) for the manufacturing of motorbikes that are manufactured by Parts. Under the
current policy, Bikes should buy all convertors from Parts, and Parts should first consider selling
convertors to Bikes before selling outside. At a recent meeting, it has been discussed that the Head Office interference is frustrating the
efforts of the divisional managers and as a result, the Head Office should remove the prescription
of requiring the two divisions to first do business with each other but rather to allow them to make
all decisions in relation to their divisions without head office interference. This include deciding
where to buy and where to sell. The following information relates to the two divisions for the forth coming period:
Bikes:
17 500 convertors will be required. External manufacturers of the same convertor are selling it for
$400 per unit. The external convertors are of the same quality and conformance as the ones
manufactured by parts.
Parts:
The following had been
| budgeted capacity for the fourth coming period | 30,000 convertors |
| selling price per convertor (to external customers) | N$425 |
| variable costs per convertor (sold to external customers) | N$385 |
If Parts sells to Bikes, the variable cost per convertor will be less by N$15 which is the transport
cost that Parts will not incur by selling inside.
Parts’s external customers for the convertors will require a maximum of 15 000 convertors for the
forth coming period.
required:
a.) In light of changing their current policy, calculate how many convertors
Parts should supply to Bikes in order to be goal congruent?
b.)Determine the
transfer price of these convertors and offer advice to the Head Office of HD
that is deemed necessary?
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