The General Appliance Corporation (GAC), specializing on manufacturing various kinds of home appliances. The GAC was decentralized and it divided into 4 main product divisions, 4 manufacturing divisions as well as 6 staff offices. GAC manufactured few component parts and usually bought them from outside vendors. Transfer prices of the parts were negotiated between departments based on outside suppliers’ price. While the purchasing staff had the power to settle disputes when there was a disagreement. This management style and method created various problems within the company because the lack of communication, coordination, and motivation. Besides, departments have less power and authority on resources allocation and there was extensive measurement in the company. As a result, GAC has to refine its transfer rules, setting guidelines to avoid disputes between divisions and outside vendors.
Issues and Analysis
Issue #1 “Stove top Problem”:
When the chrome products division sold a chrome plated unit that fitted on the top of the stove. Due to various complaints from customers, chrome products division to refine products leading an increase the cost of the stove top ($10) by a dollar. 90 cents less than outside supplier (manufacturing costs are deemed to have increased by 80 cents). (Quality; communication; transfer prices Resolution: Engineer department said the costs were reasonable and quality control said the quality improved and better than previously supplied.
Issue #2 “thermostatic control problem”
Refrigeration Division initially used 25% of their Thermostatic Control Unit produced from Electric Motor Division internally. All remaining unites are purchased from Monsoon Controls Corp in 1985. It increased to 100% produced internally by 1988. After Monsoon Controls proposed a price of $2.15/unit, electric motor division refuses to drop its price lower than $2.40 to all products divisions. Resolution: Refrigeration Division could purchase all at $2.15 but the price is lower because of excess capacity. If purchase all, the price would go up to around $2.40 too.
Issue #3 “transmission problem”
The Laundry Division produces automatic washers and bought its parts from two sources : internally in the Gear and Transmission Division and externally form the Thorndike Machining Corp. GAC would like to expand and wanted to produce all the manufacturing parts, therefore, not renewing contract with Thorndike. Thorndike proposed a new price with reductions because they had specially built machines for the transmission and expected to increase productivity. Gear division also develop a lower cost and better performance transmission. Laundry Division refused to accept the price of $12 and proposed $11.21 instead. Resolution: The Finance department thought the costs of the Thorndike unit was 11.25 and found out the price of the Gear and transmission price was in error and could be reduce by 50 cents. The purchasing staff stated that laundry division can obtain from outsource at the quoted price for a better future.
GAC should refine its transfer pricing policies and methods to reduce disputes between divisions within company. First, they can focus more on short term profit maximization because signing long term contracts with either divisions will causes higher cost prices. As a good company, its product quality should be in their main consideration, customer will buy better quality rather than its price. Third, the management should give power to the product division to select which manufacturers they wanted. However, they have to bear the consequences if the results gone bad (e.g. bad quality for cheaper price). Forth, A committee should set up to investigate the pros and cons to the divisions for a better decisions and judgments for product division to made before ordering parts.