27th Edition
WARREN + 5 others
ISBN: 9781337272094




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


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...

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