Question

C23-40. Transfer Price Decisions

The Consulting Division of IBM Corporation is often involved in assignments for which IBM computer equipment is sold as part of a systems installation. The Computer Equipment Division is frequently a vendor of the Consulting Division in cases for which the Consulting Division pur- chases the equipment from the Computer Equipment Division. The Consulting Division does not view itself as a sales arm of the Computer Equipment Division but as a strong competitor to the major consulting firms of information systems. The Consulting Division’s goal is to maximize its profit contribution to the company, not necessarily to see how much IBM equipment it can sell. If the Consulting Division is truly an autonomous investment center, it has the freedom to purchase equipment from competing vendors if the consultants believe that a competitor’s products serve the needs of a client better than the comparable IBM product in a particular situation.

REQUIRED

a. In this situation, should corporate management be concerned about whether the Consulting Division sells IBM products or those of other computer companies? Should the Consulting Division be required to sell only IBM products?

b. Discuss the transfer-pricing issues that both the Computer Equipment Division manager and the Consulting Division manager should consider. If top management does not have a policy on pricing transfers between these two divisions, what alternative transfer prices should the division managers consider?

c. What is your recommendation regarding how the managers of the Consulting and Computer Equipment Divisions can work together in a way that will benefit each of them individually and the company as a whole?

Answer 1