Question - Read the following scenario: Blue Bird Company is a major manufacturer of construction equipment. Over the past several years, Blue Bird has bought component parts from Orange Inc., a small company in the Midwest. Orange charges all customers $55/unit for this part. The variable cost/unit is $25, the allocated overhead is $15, and the mark-up is another $15.The General Manager of Blue Bird thinks that it would be great cost saving measure to buy Orange, and thus convinces the Board of Directors to purchase 100% of Orange's common stock. After the acquisition, Orange continues to manufacture the component parts and to sell them to the same customers at the same price as before. At the most recent meeting of Blue Bird's directors, a controversy has started because Orange still charges Blue Bird $55/unit for the part. The directors believe that the part should be sold to their company at cost. Orange Inc. contends that the full price better reflects its profitability, and that the company would be unfairly punished by transferring the part to Blue Bird.
Discuss the following information in your initial post:
How does the decision about the transfer price affect consolidated net income?
Which transfer price would be easiest for Blue Bird's accounting department to keep track of? Why?
As Blue Bird's accountant, what price do you recommend? Be sure to fully explain your position.