Question

Rambotix Company has two divisions, the Semiconductor Division and the X-ray Division. The X-ray Division may purchase semiconductors from the Semiconductor Division or from outside suppliers. The Semiconductor Division sells semiconductor products both internally and externally. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took place between Dave and Howard: Dave: I hear you are having problems selling semiconductors out of your division. Maybe I can help. Howard: You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity? After all, we are part of the same company. Dave: What kind of price could you give me? Howard: Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $100 for 100 semiconductors. Dave: I'm not so sure we can swing that. I was expecting a price break from a “sister” division. Howard: Hey, I can only take this “sister” stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firm—market price. After all, it's only fair—that's what you would have to pay from an external supplier. Dave: Fair or not, I think we'll pass. Sorry we couldn't have helped Was Dave behaving ethically by trying to force the Semiconductor Division into a price break? Comment on Howard's reactions. Responses must be a minimum of 50 words.

Answer 1

As per the above conversation, it is clear that Semiconductor division is unable to sell 10% of its capacity to outside customers, while the other division of the same company also requires the semiconductors which are currently purchased from outside market. In this condition Dave 's behaviour is not ethical because it is thinking only from his division point of view, while ignoring the overall impact on company.
When there are conditions like limited capacity to outside market, the product from vacant capacity can be sold to other division for which the minimum selling price is the relevant cost i.e variable costs. and for the units which are already sellable to outside market , relevant transfer price is market price at which it is selling.
Here the response of dave to x- ray division to give the price break is not correct. It can sell is product from surplus capacity upto the transfer price of market price, which the manager of x-ray division already offered. Howard's reaction is ethically correct but still from the point of view of company as a whole, it can;t be said correct because there is a benefit to the company if there are internal transfers. If semiconductor division sells at market price it gives it profit of (market price - variable cost) and on other side there is no profit no loss to the x-ray division , which in turn benefit the company as a whole. Even if X-ray division buys from semiconductor division at higher price, then the loss of x-ray division (Purchase price - Market price) is setoff by profit of semiconductor division and net benefit to the company remains at (transfer price - Variable costs). Hence they should try to get the semiconductor internally and must set a reasonable price which will not impact the profitability of any divisions.