Question: Transfer-Pricing Concession You are the divisional controller of the U.S. division of Samtech Electronics. Your division is operating at capacity. The Australian division has asked the U.S. division to supply a sound system (chip and speaker), which it will use in a new model Game Box that it is introducing. The U.S. division currently sells identical sound systems to outside customers at $11.00 each. The Australian division has offered to pay $7.00 for each sound system. The total cost of the Game Box is as follows:
The Australian division is operating at 50% of capacity, and this Game Box is an important new product introduction to increase its use of capacity. Based on a target-costing approach, the Australian division management has decided that paying more than $7.00 for the sound system would make production of the Game Box infeasible because the predicted selling price for the Game Box is only $62.00. Samtech Electronics evaluates divisional managers on the basis of pretax ROI and dollar profits compared to the budget. Ignore taxes and tariffs.
1. As divisional controller of the U.S. division, would you recommend supplying the sound system to the Australian division for $7.00 each? Why or why not?
2. Would it be to the short-run economic advantage of Samtech Electronics for the U.S. division to supply the sound system to the Australian division? Explain your answer.
3. Discuss the organizational and behavioral difficulties, if any, inherent in this situation. As the U.S. division controller, what would you advise the Samtech Electronics president to do in this situation?