Wager Enterprises has four operating divisions: Tours, Hotels, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands):

Tours Division participates in a “frequent explorer” program with Hotels Division. During the past year, Tours reported that it traded lodging award coupons for tours that had a retail value of $850,000, assuming that the tours were redeemed at full prices. Concerts Division offered 20 percent discounts to Wager’s tour customers and hotel guests. These discounts to tour customers were estimated to have a retail value of $240,000. Wager’s hotel guests redeemed $560,000 in concert discount coupons. The Hotels Division also provided rooms for employees of the Tours Division (drivers and guides). The value of the rooms for the year was $2.4 million. 

Ticket Services Division sold tickets on behalf of Tours Division valued at $320,000 for the year. This service for intracompany lodging was valued at $160,000. It also sold concert tickets for Concerts; tickets for intracompany concert admission were valued at $80,000. 

While preparing all of these data for financial statement presentation, Tour Division’s controller stated that the value of the hotel rooms used for Tours Division employees should be based on their differential and opportunity costs, not on the full price. This argument was based on the fact that the hotel rooms are usually those that would otherwise be empty or sold at a discount. If the differential and opportunity costs were used for this transfer price, the value would be $460,000 instead of $2.4 million. Hotel Division’s controller made a similar argument concerning the concert discount coupons. If the differential cost basis were used for the concert coupons, the transfer price would be $80,000 instead of $560,000. 

Wager Enterprises reports assets in each division as follows (dollars in thousands): 

Required

a. Using the retail values for transfer pricing for segment reporting purposes, what are the operating profits for each Wager Enterprises division?

b. What are the operating profits for each Wager Enterprises division using the differential cost basis for pricing transfers?

c. Rank each division by ROI using the transfer pricing methods in requirements (a) and (b). What difference does the transfer pricing system have on the rankings?

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Revenues Costs. Tours $8,840 5,680 Hotels $19,600 12,560 Concerts $ 7,120 5,280 Ticket Services $2,560 2,400