Chapter 15, Problem 46P

Weaver, Inc., is a large consumer products company, which manufactures health and beauty products sold at grocery and drug stores throughout the country. Gamma Division does both manufacturing and shipping and operates a warehouse and transportation activity in a central location. Gamma loads trucks with products and ships the products using third-party trucking companies to its regional distribution centers.

Weaver recently started a new enterprise, Nu, which would focus on logistics alone, providing transportation services to both other Weaver divisions and third parties. The manager of Nu proposes using the warehouse facility of Gamma, at least to start. Employees of Gamma would load the trucks for the Nu business as well as the Gamma business.

All divisions at Weaver are treated as profit centers with managers evaluated on division profit. The best estimates of the current activity and costs of Gamma Division follow:

Required

1. a.      The current activity estimated for Nu Division is 5,000 cases. The company has asked you to recommend a transfer price policy to implement. What transfer price would you recommend? Why?
2. b.      How would the division manager for Gamma Division likely respond? How would you answer?
3. c.       Another manager has identified another opportunity and also proposes using the Gamma Division facility. Estimated activity for this third division is expected to be 7,500 cases. How would you modify, if at all, your recommendation in requirement (a)?