Transfer pricing, goal congruence. The Croydon Division of CC Industries supplie

Question

Transfer pricing, goal congruence. The Croydon Division of CC Industries supplies the Hauser Division with 100,000 units per month of an infrared LED that Hauser uses in a remote control device it sells. The transfer price of the LED is $8, which is the market price. However, Croydon does not operate at or near capacity. The variable cost to Croydon of the LED is $4.80, while Hauser incurs variable costs (excluding the transfer price) of $12 for each remote control. Hauser’s selling price is $32.

Hauser’s manager is considering a promotional campaign. The market research department of Hauser has developed the following estimates of additional monthly volume associated with additional monthly promotional expenses.

Additional Monthly Promotional Expenses:

$80,000

$120,000

$160,000

Additional Monthly Volume (Units)

10,000

15,000

18,000

Required

1. What level of additional promotional expenses would the Hauser division manager choose?

2. As the manager of the Croydon division, what level of additional promotional expenses would you like to see the Hauser division manager select?

3. As the president of CC Industries, what level of spending would you like the Hauser division manager to select?

4. What is the maximum transfer price that would induce the Hauser division to spend the optimal additional promotional expense from the standpoint of the firm as a whole?

Explanation / Answer

Ans 1 Additional Monthly Volume      10,000.00      15,000.00      18,000.00 Contribution Per Unit              12.00              12.00              12.00 Total Contribution 1,20,000.00 1,80,000.00 2,16,000.00 Less Promotional Expenses      80,000.00 1,20,000.00 1,60,000.00 Net incermental income      40,000.00      60,000.00      56,000.00 Hauser division profit is maximized when it spends 120000 . Ans 2 Croydon Division current supply t Hauser 1,00,000.00 Contrubution Per Unit( 8-4.8) 3.2 Total Contribution 3,20,000.00 Croydon Division profit is maximized at the level of maximum supply to Hauser ie 160000 Ans 3 Additional Monthly Volume      10,000.00      15,000.00      18,000.00 Contribution Per Unit (SP of Hauser-VC of Croydon+VC of Hauser Excl transfer Price) (32-4.8-12) 15.2 15.2 15.2 Total Contribution 1,52,000.00 2,28,000.00 2,73,600.00 Less Promotion Expenses      80,000.00 1,20,000.00 1,60,000.00 Net incermental income      72,000.00 1,08,000.00 1,13,600.00 Total CC Industries profit is maximized at the level where 160000 is spent as promotional expense Ans 4 Additional Contribution required to make up =Net Incremental income at the spend of 160000-Net Incremental income at the spend of 120000 4000 Incremental Units with respect to above        3,000.00 Redcution in TP required ( Increase in Contribution Required)                 1.33 Current TP 8 Less reduction                 1.33 Revised TP                 6.67

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