In hope of reducing manufacturing costs slagle purchases

Reference no: EM13485141

Slagle Corporation is a large manufacturing organization. Over the past several years, it has obtained an important component used in its production process exclusively from Harrison, Inc., a relatively small company in Topeka, Kansas. Harrison charges $90 per unit for this part:

Variable cost per unit $40

Fixed cost assigned per unit 30

Markup 20

Total price $90

In hope of reducing manufacturing costs, Slagle purchases all of Harrison's outstanding common stock. This new subsidiary continues to sell merchandise to a number of outside customers as well as to Slagle. Thus, for internal reporting purposes, Slagle views Harrison as a separate profit center.

A controversy has now arisen among company officials about the amount that Harrison should charge Slagle for each component. The administrator in charge of the subsidiary wants to continue the $90 price. He believes this figure best reflects the division's profitability: "If we are to be judged by our profits, why should we be punished for selling to our own parent company? If that occurs, my figures will look better if I forget Slagle as a customer and try to market my goods solely to outsiders."

In contrast, the vice president in charge of Slagle's production wants the price set at variable cost, total cost, or some derivative of these numbers. "We bought Harrison to bring our costs down. It only makes sense to reduce the transfer price; otherwise the benefits of acquiring this subsidiary are not apparent. I pushed the company to buy Harrison; if our operating results are not improved, I will get the blame."

Will the decision about the transfer price affect consolidated net income? Which method would be easiest for the company's accountant to administer? As the company's accountant, what advice would you give to these officials?

Reference no: EM13485141

Questions Cloud

Indicate the effects that each of the 5 adjusting journal : indicate the effects that each of the 5 adjusting journal entries will have upon each of the following six sections of

Determine the equivalent units of production for cereal : assume the inventory in process for february 1 for the packing department included 1200 pounds of cereal in the packing

Determine a cash payments schedule for january through : bombs away video games corporation has forecasted the following monthly salesjanuary 100000 july 45000february 93000

Describe the methods available to a firm for expediting the : describe the methods available to a firm for expediting the collection of

In hope of reducing manufacturing costs slagle purchases : slagle corporation is a large manufacturing organization. over the past several years it has obtained an important

Describe the matching approach for meeting the financing : describe the matching approach for meeting the financing needs of a company. what is the primary difficulty in

In june 2000 ljm2 purchased dark fiber optic cable from : enron corporations 2001 third-quarter 10-q report disclosed the following transaction with ljm2 a nonconsolidated

Describe the five cs of credit used in evaluating the : describe the five cs of credit used in evaluating the creditworthiness of a credit

Describe the different ways in which capital can be : describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding

User Account

All Pages