Blair Electronics Corporation makes a Wi-Fi receiver that it sells to retail stores for $75 each. The variable cost to produce a receiver is $35 each; the total fixed cost is $5,000,000. Blair is operating at 80 percent of capacity and is producing 200,000 receivers annually. Blair’s parent company, Harvey Corporation, notified Blair’s president that another subsidiary company, Grogan Technologies, has begun making home theater systems and can use Blair’s receiver as a part. Grogan needs 40,000 receivers annually and is able to acquire similar receivers in the market for $72 each.
Under instructions from the parent company, the presidents of Blair and Grogan meet to negotiate a price for the receiver. Blair insists that its market price is $75 each and will stand firm on that price. Grogan, on the other hand, wonders why it should even talk to Blair when Grogan can get modems at a lower price.
a. What transfer price would you recommend?
b. Discuss the effect of the intercompany sales on each president’s return on investment.
c. Should Blair be required to use more than excess capacity to provide receivers to Grogan if Grogan’s demand increases to 60,000 receivers? In other words, should it sell some of the 200,000 receivers that it currently sells to unrelated companies to Grogan instead? Why or why not?