Case Study 2

Case Study 2

This case is about a company named MBR Inc. which merged with three independent manufacturing companies. They become separate divisions and still have the same name of the company. Two divisions are unable to decide on a transfer price because interdivisional transactions have never been done before. The vice president of finance wants to set a price that is equal to standard full manufacturing cost. Also, the division wants to come to a price that is grossly fair with everyone.

A. Roper division shouldn’t agree to the first proposal, because they will be losing $2.10 while Mitchell is saving $.60 which is not fair to Roper. The second proposal each division will be saving $1.44 and this should be the proposal chosen, because it is reasonable for the two divisions. The third proposal Mitchell will be saving $2.60 but $3.30 is being lost in Roper division.

B. Instead of negotiating, MBR Inc. should provide training to the two divisions because they have not established a transfer pricing policy. Training will make the two divisions management for setting transfer prices. This will help them to sell transfer pricing more effectively and come to an agreement on choosing the second proposal, because it is reasonable to both divisions.

C. MBR Inc. shouldn’t be involved in this transfer price disagreement, because these are independent manufacturers who are used to making pricing decisions on their own. Central management would choose a price that is more companywide instead of being divisional bases. In the end result is an unjust determination to one of the divisions.

Proposal Transfer Price | Mitchell | Roper | Market Price |

$5.90 | .60 | 2.10 | 6.50 |

$5.06 | 1.44 | 1.44 | 6.50 |

$3.84 | 2.60 | 3.30 | 6.50 |