The Crimson Press Curriculum Center

First Page and the Assignment Questions:
If I were to price this conference any lower than $480 a participant, I’d be countermanding my order of last month for our marketing people to stop shaving their bids, and to make full-cost quotations. I’ve been trying for weeks to improve the quality of our business. If I turn around now and drop my bid to $430 or $450, or something less than $480, I’ll be tearing down this program I’ve been working so hard to build. The division can’t very well accomplish its objective by putting in bids that don’t even cover a fair share of overhead costs, let alone a safety margin.

The speaker was James Brunner, manager of National Youth Association’s (NYA’s) housing division. The housing division operated a conference center, and its facilities were used both by NYA and and other organizations. He continued:

I helped Bill [William Kenton, manager of the conference center] plan for the conference, and received no payment for my time for doing that. So, in my opinion, I’m entitled to a good markup on the use of my facilities.

BACKGROUND

National Youth Association a large nonprofit organization with several hundred local chapters. It published a magazine and books, held a national convention, and arranged a number of conferences.

The association’s national headquarters comprised several divisions. Among them was the conference division that developed and managed a number of professional development conferences for the association’s members. Another was the housing division. A third was the produce division, which operated a livestock, poultry, and produce farm, located nearby on property that had been donated to NYA many years ago.

Each division operated independently. The financial objective of each was to provide a margin above its costs to help finance headquarters’ activities and to provide a cushion against unforeseen contingencies. Senior management of NYA had been working to gain effective results from a policy of decentralizing responsibility and authority for all decisions except those relating to overall NYA policy. The association’s senior management believed that in the past few years the concept of decentralization had been successfully applied and that the association’s financial position had improved considerably.

In accordance with the decentralization policy, each division was normally free to buy from whatever supplier it wished. If sales within the company appeared feasible, divisions were expected to meet the going market price if they wanted the business.

THE CONTROVERSY

The conference division had developed a three-day conference that is planned to offer several times a year. Mr. Brunner had spent many hours with Mr. Kenton working on these plans. When the plans were completed, Mr. Kenton had asked for bids from the housing division as well as from two local hotels. It received bids of $480 a participant from the housing division, $430 from the Magnolia Hotel, and $432 from the Golden Eagle Hotel. Golden Eagle had offered to buy its food ingredients from the produce division, at a price of $90 a participant.

Assignment

1.   Which bid is in the best interest of the NYA?

2.   Should Mr. Kenton accept this bid? Why or why not?

3.   Should the NYA executive director take any action? If so, what?

4.   How, if at all, is the transfer pricing policy causing the problem? Are changes needed in NYA’s transfer pricing policy? If so, what changes do you suggest?