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Ethics and professional conduct in business Rambotix Company has two divisions, the Semiconductor Division and the X-ray Division. The X-ray Division may purchase semiconductors from the Semiconductor Division or from outside suppliers. The Semiconductor Division sells semiconductor products both internally and externally. 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, $1 00 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. Was Dave behaving ethically by trying to force the Semiconductor Division into a price break? Comment on Howard's reactions.

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615
Chapter 24, Problem 24.1CP
Textbook Problem
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Ethics and professional conduct in business

Rambotix Company has two divisions, the Semiconductor Division and the X-ray Division. The X-ray Division may purchase semiconductors from the Semiconductor Division or from outside suppliers. The Semiconductor Division sells semiconductor products both internally and externally. 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, $1 00 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.

Was 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 DB in setting transfer prices, and comments on H’s reaction

Explanation of Solution

Ethical behavior of DB: 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 DB is the head of X Division, the buying division. DB’ behavior is ethical because he wanted to buy at a price less than the market price, $100. DB’ 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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Chapter 24 Solutions

Accounting (Text Only)
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Ch. 24 - Budgetary performance for cost center Caroline...Ch. 24 - Budgetary performance for cost center Conley...Ch. 24 - Service department charges The centralized...Ch. 24 - Service department charges The centralized...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Profit margin, investment turnover, and ROI Cash...Ch. 24 - Profit margin, investment turnover and ROI Briggs...Ch. 24 - Residual income The Consumer Division of Hernandez...Ch. 24 - Residual income The Commercial Division of Herring...Ch. 24 - Transfer pricing The materials used by the North...Ch. 24 - Transfer pricing The materials used by the...Ch. 24 - Budget performance reports for cost centers...Ch. 24 - Divisional income statements The following data...Ch. 24 - Service department charges and activity bases For...Ch. 24 - Activity bases for service department charges For...Ch. 24 - Service department charges In divisional income...Ch. 24 - Service department charges and activity bases...Ch. 24 - Divisional income statements with service...Ch. 24 - Corrections to service department charges for a...Ch. 24 - Profit center responsibility reporting XSport...Ch. 24 - Rate of return on investment The income from...Ch. 24 - Residual income Based on the data in Exercise...Ch. 24 - Determining missing items in return computation...Ch. 24 - Profit margin, investment turnover, and rate of...Ch. 24 - Rate of return on investment The Walt Disney...Ch. 24 - Determining missing items in return and residual...Ch. 24 - Determining missing items from computations Data...Ch. 24 - Rate of return on investment, residual income for...Ch. 24 - Balanced scorecard for a service company American...Ch. 24 - Building a balanced scorecard Hit-n-Kun Inc. owns...Ch. 24 - Decision on transfer pricing Materials used by the...Ch. 24 - Decision on transfer pricing Based on XPort...Ch. 24 - Budget performance report for a cost center...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and rate of return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Garcon Inc. manufactures...Ch. 24 - Budget performance report for a cost center The...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and rate of return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Exoplex Industries Inc. is a...Ch. 24 - Ethics and professional conduct in business...Ch. 24 - Service department charges The Customer Service...Ch. 24 - Evaluating divisional performance The three...Ch. 24 - Evaluating division performance over time The...Ch. 24 - Evaluating division performance Last Resort...

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