BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Ethics in Action

Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and external customers. The company’s X-ray Division uses semiconductors as a component in its final product and is evaluating whether to purchase them from the Semiconductor Division or from an external supplier. 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.

Is Dave behaving ethically by trying to force the Semiconductor Division into a price break? Comment on Howard's reactions.

To determine

Transfer price: The price charged for the goods and services transferred among the divisions is referred to as transfer price.

Approaches for setting transfer prices:

  • Market price approach
  • Negotiated price approach
  • Cost price approach

To discuss: The ethical behavior of D in setting transfer prices, and comments on H’s reaction

Explanation

Ethical behavior of D: If the selling or supplying division holds excess capacity, then the buying division could prefer the negotiated price approach over market price approach. So, the selling division negotiates to sell at a price not less than the variable expenses, and the buying division negotiates to purchase at a price less than the market price. This is the main factor involved in setting transfer prices.

In the given situation, H is the head of S Division, the supplying division and D is the head of X Division, the buying division. D’ behavior is ethical because he wanted to buy at a price less than the market price, $100. D’ behavior would be unethical if he intended to refuse the offer of H and prove that the performance of S Division is not good...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

OPTIMAL CAPTTAL BUDGET Marble Construction estimates that its WACC is 10% if equity comes from retained earning...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

How does choice arise out of scarcity?

Economics (MindTap Course List)