Reference no: EM133115642

Question - Mozitoto Inc. creates animated music videos for kids. The firm is divided into two sections: design and music. The designing section creates the animated images, while the music section composes the music and songs that will accompany the images.

The average total cost per unit of video in the designing division is over $190, whereas the average total cost per unit in the music sector is around $50. The video's average selling price is $375. The firm is at full capacity.

Since five years ago, the design division has "sold" the design to the music division for an agreed transfer price of $265, creating a profit of $75 for every video.

The manager of the designing division recently stated that he would like to raise the transfer cost to $305 per unit. The music division manager rejects the new transfer fee, claiming that it will reduce his division's earnings. The manager of the designing division stated that he will no longer supply the music section. He maintains that the $265 pricing is no longer the current market price. Another business has approached him and is offering to acquire the entire batch at a unit price of $310.

The music division manager has asked you, the general manager, to settle the situation and instruct the design manager to maintain the existing transfer price and not allow him to sell outside when there is a division in the same business that requires the product.

a. What are the elements that you need to look into to settle the issue?

b. How much profit did the music manager make from the previous transfer pricing? How much will he make if the new transfer pricing is accepted?

c. Name 2 elements from the text that could be used to justify the request of the designing division manager.

d. What recommendations would you make to both managers?