Transfer Pricing/Strategy Case Robert Products Inc. consists of three decentrali

Question

Transfer Pricing/Strategy Case Robert Products Inc. consists of three decentralized divisions: Bayside Division, Cole Division, and Diamond Division. The president of Robert Products has given the managers of the three divisions authority to decide whether to sell outside the company or among themselves at an internal price determined by the division managers. Market conditions are such that sales made internally or externally will not affect market or transfer prices. Intermediate markets will always be available for Bayside, Cole, and Diamond to purchase their manufacturing needs or sell their product. The manager of the Cole Division is currently considering the two alternative orders presented below The Diamond Division is in need of 3,000 units of a motor that can be supplied by the Cole Division To manufacture these motors, Cole would purchase components from the Bayside Division at a price of S600 per unit; Bayside's variable cost for these components is $300 per unit. Cole Division will . further process these components at a variable cost of S500 per unit. If the Diamond Division cannot obtain the motors from Cole Division, it will purchase the motors from London Company which has offered to supply them to Diamond at a price of $1,500 per unit. London Company would also purchase 3,000 components from Bayside Division at a price of $400 for each of these motors; Bayside's variable cost for these components is $200 per unit. The Wales Company wants to place an order with the Cole Division for 3,500 similar motors at a price of $1,250 per unit. Cole would again purchase components from the Bayside Division at a price of S500 per unit; Bayside's variable cost for these components is $250 per unit. Cole Division will further . process these components at a variable cost of $400 per unit. The Cole Division's plant capacity is limited, and the division can accept either the Wales contract or the Diamond order, but not both. The president of Robert Products and the manager of the Cole Division agree that it would not be beneficial in the short or long run to increase capacity REQUIRED 1. Determine whether the Cole Division should sell motors to the Diamond Division at the prevailing market price, or accept the Wales Company contract. Support your answer with appropriate calculations What strategic factors should Robert Products consider as the Cole and Diamond divisions make their respective decision?

Explanation / Answer

To decide what decision should be taken by Cole division, profitability should be compared in below scenarios:

Scenario 1) Selling 3000 units to Diamond Division at prevailing market price i.e. $1500 per unit:

a) Profit to Cole:

b) Profit to Bayside:

c) Cost to Diamond : 3000*1500 = 4500000

d) Overall Profit/Loss to Robert Products :

Scenario 2) Diamond Division purchase 3000 units from London Company & Cole division sells 3500 units to Wales company:

a) Profit/loss to Cole Division

b) Profit to Bayside:

c) Cost to Diamond Division: 1500 * 3000 = 4500000

d) Overall Profit/(Loss) to Robert Products:

Answers:

If profitability of Cole division is taken into consideration then Cole division should opt for selling the product to Wales Company as it will result in higher absolute profit by $ 25000.(Refer above working (a) in both scenarios).

However, when we look at absolute profit numbers of Robert Products as a whole, selling 3500 units to Wales Company will result in overall loss of $ 1,800,000.

Hence, management of Robert products should not opt for Selling 3500 units to Wales & purchasing 3000 units from London Company as it will result in overall loss to the organisation.

2. Following strategic factors should be considered by Robert Products:

a)Robert Products should formulate strategies which states clearly the objective of achieving maximum profit to an organization.

b)Also, managers/target employees should be educated that profit should not be analyzed from any one of the divisions/segments/Business unit perspective but should be analyzed keeping organization as whole.

c)Such strategies should be implemented in the ERP’s & organization should educate managers/target employees on how to use such tools for analyzing impact of their decision on an organization.

d)Internal process of accepting orders from external as well as internal sources should be accepted post analyzing the cost benefits.

Particulars Per unit Total (3000units) Selling price 1500 4500000 Purchase price from Bayside 600 (1800000) Variable cost 500 (1500000) Profit to Cole 1200000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.