wna ee the original quotation, the price would be $11.2 same as that proposed by the Laundry Equipmet ‘The price of $11.68 d "by the Gear and Transmission Divi smission Division for the foreseeable future. Questions 1. Be prepared in each of the mnagers, you should not simply repe !arguments presented in the case; you should also be prepared to five whore your position is weak, to introduce new (but realist) arguments tp battress your case, and to deal rationally with your adversary’ argumente 2. What, if any, changes in tho company's transfer price policies and proce. ‘dures would you recommend? Chgter6 Transfer Prong 267 OO Case 6-4 Medoc Company ‘he Miling Divison ofthe Madoc Company milled four a manufactured ¢ variety of co 1. Approximately 70 percent (by weigh Products Division and marketed by this Consumer Products Division was respons of packaging; that is, it handled warehousing, tions as well as advertising and other salos ter products from it. Its output was distributed as follows: ransferred to the Consumer Counting each size and pack as one unit, there were several hundred prod Ucts in the line marketed by the Consumer Products Division, The grogstnar, gin percentage on these products was considerably higher than that on flew sold to industrial users, ‘ment centers in the Medoc Company. Products were transferred from the Milling Division to the Conoumer Prod- ‘ucts Division at @ unit price that corresponded to aetual cost. There was 4 var ‘ost included elements in the Iso, 75 percont of the Milling Di sumer Products Division ween the Milling Division and the ion, primarily for three reasons, 1. As in many process industries, unit costs we plant operated at capacity. Indeed, the pr ignificantly lower when the pal reason for accepting the ‘Ts cs was reared by Robt N. Athen, Hana Busnes Sooo. Cope bythe Present ‘nd felons cava Caege. Hav ushass Shea coe 11 aoefanagenen Contre Briroament Jow-margin industrial business was to permit capacity operations. There was general agreement that acceptance of such business ata low margin, or ven at something less than full-cost, was preferable to operating at less in recent years, the Milling Division had operated at no less industry it served, even though it reduced the average profit margin ofthe Consumer Products he Consumer Products Division admitted thet there was come validity such business when it was charged full cost for 2, The Consumer Produets Division complained that although it was charged for 75 percent of the investment in the Milling Division, it did not partici- ‘decisions regarding the acquisition of new equipment, ny levels, ete. It admitted, however, that the people in the Milling ma were technically more competent to make these decisions. since products were pay for production inem- changed to i at actual eos, it Ciencies that were the respons price either to a market price or to the price chs justrial customers, Because of differences in product composition, how- fit performance of tho Milling Division and the Consumer Prod- should be measured separately; thats, it ruled out the simple s0- fixed monthly charge. ‘The monthly nonvariable overhead charge would be set annually. It would corresponding tothe fraction of products that was estimated would ferred to the Consumer Products Division (about 80 percent) Chapter 6 Transfer Pricing 269 2, A return of 10 percent on the same fraction of the ment, This was higher than the return that the Milling Divs Sales to industrial users. The selection of 10 percent was arbitrary because there was no way of determining a “truo" return on products sold by the Consumer Products Division. Questions 1 What would you recommend giver the organizational structure constraints in the case? 2, What would you recommend if there were no organizational structure con straints on your options?