Transfer Price issues between the Taif and LA Ind divisionsLTD is a diversified manufacturing company with a
decentralized management structure. Each major division is treated as a
profitcenter. One of the divisions is Taif, a chemical plant that produces a
single product, XY. In recent years, the entire annual output of 400,000 tons
of XY has been sold to another division, LA Ind, which uses it as an ingredient
in a variety of products. The transfer price is
currently $2,100/ton. Variable cost to produce XY is $600/ton. Taif’s fixed
costs are $540 million per year, resulting in a total cost of $1,950/ton. Of
the fixed cost, 30% is depreciation on plant and equipment, and 25% is
allocated corporate-level costs.
LA Ind has found an outside supplier for XY at a price of
$1,550/ton. The president of LA Ind refuses to meet this price, as it is below
cost. The president of LA Ind says she will purchase externally if Taif refuses
to meet the market price. As CEO of LTD, discuss the factors that should be
considered in resolving this dispute.
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