Discussion 5.1 What Price Should We Charge Ourselves?Slagle

Discussion 5.1: What Price Should We Charge Ourselves?Slagle Corporation is a largemanufacturing organization. Over the past several years, it has obtained animportant component used in its production process exclusively from Harrison,Inc., a relatively small company in Topeka, Kansas. Harrison charges $90 perunit for this part:Variable cost per unit$40Fixed cost assigned per unit$30Markup$20Total$90In hope of reducing manufacturingcosts, Slagle purchases all of Harrison’s outstanding common stock. This newsubsidiary continues to sell merchandise to a number of outside customers aswell as to Slagle. Thus, for internal reporting purposes, Slagle views Harrisonas a separate profit center.A controversy has now arisen among company officials about the amount thatHarrison should charge Slagle for each component. The administrator in chargeof the subsidiary wants to continue the $90 price. He believes this figure bestreflects the division’s profitability: “If we are to be judged by our profits,why should we be punished for selling to our own parent company? If thatoccurs, my figures will look better if I forget Slagle as a customer and try tomarket my goods solely to outsiders.”In contrast, the vice president in charge of Slagle’s production wants theprice set at variable cost, total cost, or some derivative of these numbers.“We bought Harrison to bring our costs down. It only makes sense to reduce thetransfer price; otherwise the benefits of acquiring this subsidiary are notapparent. I pushed the company to buy Harrison; if our operating results arenot improved, I will get the blame.”Will the decision about the transfer price affect consolidated net income?Which method would be easiest for the company’s accountant to administer? Asthe company’s accountant, what advice would you give to these officials?