Essay on As Per The Company Policy Of Decentralizing

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1. As per the company policy of decentralizing, Mr. Kenton as the manager of ND should take the bid of lowest price from W at $430
2. Cost to the company as a whole
W bid price $430= actual cost to QC
E bid price$432
Contribution of profit from SD $90*(1-60%)=$36 from TD $30-$25=$5
Cost to QC=$432-$36-$5=$391
TD bid price $480
Contribution of profit from TD $480-S400=$80 From SD$400*70%*(1-60%)=$112
Cost to QC $480-$80-$112=$288

Reason to take TD’s offer
1. Actual cost to company—lowest
2. Optimalizing other division’s capacity and reduce excess inventory—indicate better profit mechanism.
3. Better strategic control—support own divisions not the competitor company
4. Inside transaction—no cash outflow to external party
5. Resources being used in the accomplishment of company’s objective---maximize wealth
6. TD’s development cost& other overhead cost(which is incurred already and resources has been spent on it ) can be compensated.
3. Yes
Reasons FOR intervention:
a) Take action to decide the best decision for company’s overall benefit
b) To improve the dysfunctional transfer pricing system—the current transfer pricing cant accommodate the issue with the prevailing market price---$480 v $430—should be adjusted to cost-based transfer pricing
Practical acts:
a) Adjust transfer pricing system
b) The senior manager board should establish an independent committee to decide the most equitable way of profit sharing ---not to hurt the decentralization policy

Calculation
Current condition
TD:
Bid price $480
Profit margin 20% Incremental cost $400
(Including the cost of material bought from SD:$400*70%=$280)
=>other overhead=$400-$280=$120

SD:
Incremental
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