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 Structural choices, transfer pricing and risk management

Chapter 6: Structural choices, transfer pricing and risk

management solutions

Overview of Chapter

One of the strategic choices that an organisation has to make is related to the degree of
centralisation and decentralisation that is required to achieve organisational objectives and how
the organisation is going to manage its organisational units. Transfer pricing is one mechanism or
process that can be used to manage strategically decentralised organisational units. Although
transfer pricing is traditionally viewed as an economic-optimisation model, the transfer pricing
process can also be used in a strategic manner. For domestic transfer pricing decisions,
organisations should consider the impact on performance of the particular transfer price method
used (market, cost or negotiated) and the implications for the motivation of managers in their
achievement of organisation-wide objectives and the management of risk. With international
MNE transfer pricing, the main risk is taxation risk and this has to be managed by the
organisation. As well as taxation risks, transfer pricing has many other risks associated with it.
These include behaviour risk, operating risks, and market and competition risks. The management
of these risks is an important part of using transfer pricing to control decentralised organisational
units in such a way that they positively contribute to overall organisational value and owner
wealth.

Solutions to Review and Discussion Questions

6.1 Identify and explain the main external and internal environmental risks related to an
organisation’s choice of structure.
The predominant external environmental risk is that relating to markets or competition. If an
organisation does not have the flexibility to respond to market changes, including changes in
product availability, supplier and customer demands, and to counteract competitor behaviour,
then organisational value and owner wealth are threatened. Another major source of external
environmental risk arises from the political environment. Regulation and legislation can have a
major impact on the choices made. Further, changes in the global economic environment
influence market, or customer, demand and resource availability. A lack of resources limits the
opportunities the organisational can pursue. Technological developments also alter the
organisation, or its competitors’ potential performance, with failure to adopt new technologies
leading to potential long-term organisational decline.
One key internal environmental risk is the inappropriate choice of a decentralisation or a
centralisation structure to support the organisational strategy. This can result in the non-
achievement of objectives and a decrease in organisational value. Related to this are the risks
associated with the cultural or the human element. These internal environmental risks include
goal incongruence or conflict, where organisational personnel are not working towards achieving
the organisation’s strategies. The competency, skills and abilities of management and other staff
may be inadequate, resulting in an inability to make decisions and incorporate risks. Lastly,
operational risks are present in structural choice decisions. The type of information system the
organisation chooses to use must be appropriate to managing and reporting on its inputs, outputs
and outcomes, as well as other systems relating to physical security.

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 Structural choices, transfer pricing and risk management

6.2 Discuss the four primary contingency-based factors that influence structural choice in
organisations.
The four main factors that influence organisational structural choice are its external environment,
size, technology, and its strategies. Each of these is discussed next.

The organisation’s external environment can be separated into three sub-factors. The first,
political, is the impact of resource providers and legislative bodies that can specify certain
structures or resource allocation criteria. The second is societal and relates to the national cultural
norms whereby organisations tend to mirror, to a considerable degree, their nation’s cultural
values. The third is environmental uncertainty. The degree of environmental uncertainty faced by
the organisation results in different structures. High environmental uncertainty tends to result in a
decentralised structure, more-sophisticated accounting and control systems, and changing
accounting roles.
The organisation’s size and the technology used to convert inputs to outputs are also key factors.
As organisations grow and become larger, more-formal control systems are needed to manage the
increase in activities, goods or services and geographical locations. Further, the process, or
technology, used to convert an organisation’s inputs to outputs in order to achieve its objectives
can influence structure along with the type of accounting used and other information provided.
The level and importance of strategic decision-making also influences the choice of
organisational structure, with research suggesting that the more significant the decisions are and
the more managers need to retain control for effective strategy implementation, then the more
centralised the structure will be. Other factors considered to influence structural choice include
complexity, globalisation and the supply chain, with an emphasis on supplier relationships,
customer demands and satisfaction, and maintaining networks.

6.3 Discuss the key advantages and disadvantages of adopting a decentralised structure.
There are several key advantages to adopting a decentralised structure.
1. Managers at lower levels can make and implement key operational decisions in their area
of responsibility and authority.
2. Local managers understand local conditions better and can gather relevant information
faster and in more detail. This reduces the time required for a decision to be made, allowing
them to respond to uncertainties and opportunities more quickly, and reduces the
information overload on senior or executive managers.
3. Upper-level management are then free to focus on the wider strategic issues and overall co-
ordination, and a decentralised structure relieves them of the operational day-to-day
decisions.
4. A decentralised structure also provides a training ground for lower-level managers to gain
experience and skills in managing innovation and risk and helps increase their job
satisfaction and motivation by giving them autonomy.
5. A decentralised structure permits more-meaningful managerial performance evaluation, as
it is hard to perform such an evaluation if the manager has no responsibility or control over
his or her area and the decisions made. Nonetheless, this requires performance evaluation
and reporting mechanisms that only measure what the manager has control over and is
accountable for.
However, there are also some key disadvantages with adopting a decentralisation approach.

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 Structural choices, transfer pricing and risk management

1. Local managers may solely focus on their unit’s performance and ignore the consequences
of their actions for other organisational areas.
2. Related to this, managers may ignore organisational objectives and follow their own so as
to improve the performance of their areas of responsibility. However, these objectives can
conflict with those of the organisation as a whole and result in goal incongruence.
3. Further, there could be a possible lack of co-ordination among the organisational unit or
lower-level managers, especially in achieving organisational operating strategies, as they
are now competing with each other.
4. Decentralisation may duplicate some tasks or services unnecessarily, thereby adding to
organisational common costs.
An organisation needs to weigh up the advantages and disadvantages and choose a structure that
supports the achievement of its strategies and objectives.

6.4 Describe the four types of responsibility centres that may be present in an organisation.
The four types of responsibility centres that may be present in an organisation are a cost centre, a
revenue centre, a profit centre, and an investment centre. A cost centre is one where the manager
has control over costs, but not revenues or investment funds. Organisational areas that may be
cost centres include finance, accounting, legal services, human resource and maintenance
departments. Conversely, a revenue centre is one where the unit manager has control only over
the revenues, not the costs or the investment funds.
In a profit centre the unit manager is given responsibility for and control over costs and revenues,
but has no responsibility for investment in operating assets. An example of a profit centre may be
a food company that has soft drink and potato chip divisions, or a telecommunication company
that has mobile phone and landline phone divisions. Lastly, an investment centre is where the unit
manager has control over, and responsibility for, costs, revenues and operating asset investment.
Typically, investment centres are areas such as corporate head-office, or the main office of a
geographical division.

6.5 Define what is meant by the terms “organisational unit” and “transfer price”.
An organisational unit is a part or area of an organisation that has an identifiable manager who is
responsible and accountable for the performance of that area.
A transfer price is the price charged for a good or service that is transferred from one
organisational unit, division or subsidiary to another.

6.6 State the general transfer price rule and outline what it means, in general, for the transfer
price if the selling unit has (a) no excess capacity and (b) excess capacity.
General Transfer Price Rule:

The transfer should take place when the opportunity cost of selling the good or service (the
minimum transfer price) is lower than the opportunity cost of purchasing the good or service (the
maximum transfer price).
This means, that in general, if the selling organisational unit has:
1. No excess or spare capacity, then transfer price will be the market price (if an external
market exists).
2. Excess or spare capacity, then the transfer price will be the marginal or variable cost.

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 Structural choices, transfer pricing and risk management

6.7 Identify the key characteristics of a good transfer pricing system.

The key characteristics of a good transfer pricing system:
1. Motivate the organisational unit manager to make decisions that are congruent with the
objectives of the organisation as a whole – e.g. to maximise group profits or organisational
value.
2. Enable reliable and accurate measurement of organisational unit performance and
organisational unit manager’s performance.
3. Ensure that organisational unit authority and autonomy is preserved and motivation of unit
managers is maximised.
4. Minimise tax within the law (for international transfer prices).

6.8 Define the three main types of transfer prices and, using a table format, outline the
advantages and disadvantages of each.
The three types are:
1. Market-based transfer price – the price the purchasing organisational unit would pay to an
external supplier and the price the selling unit could sell on an external competitive market.
2. Cost-based transfer price – a variable-cost transfer price is the variable cost (per unit) of the
selling organisational unit or division. A variation of the variable cost transfer price is the
marginal cost approach. A marginal cost generally consists of the variable cost, but can
include some fixed costs. A full-cost transfer price is the total cost (per unit) of the product
and is equivalent to the variable plus fixed costs per transferred unit.
3. Negotiated transfer price – the purchasing and selling division negotiate a transfer price
that is between the minimum price (variable cost plus any opportunity costs if relevant) and
the maximum price (the market price).
The advantages and disadvantages of each are given in the following table.

Transfer Advantages Disadvantages

Price type
Market-based • Objective and verifiable
• Places unit on a competitive basis
• Units can act independently and
are in charge of their own profits
• Effective performance evaluation
possible
Cost-based • Easy to use and understand
– Variable • Information available in
– Marginal accounting system
– Full • Variable cost: focuses attention on
contribution margin and short-term
usage of organisational facilities
• Full cost – recovers all costs of the
units
• Optimal transfer pricing decision
requires a perfectly competitive
market. If imperfect, then sub-
optimal economic decisions are
made
• If there is no market or it is difficult
to identify, then it cannot be used
• If variable/marginal cost is used,
then purchasing unit makes a profit
at the expense of the selling unit
• If not at marginal cost, then sub-
optimal economic decisions are
made
• Fixed cost – cannot use for
performance evaluation as contains

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 Structural choices, transfer pricing and risk management

uncontrollable costs and provides no

incentive to reduce costs
Negotiated • Reflects responsibility and • Very time-consuming and requires
accountability given to frequent revisions
responsibility centre managers • Can cause conflict and information
• Promotes goal congruence manipulation
• Promotes profit-sharing between • Lack of goal congruence if one
units manager has more power
• Can result in decisions that do not
meet organisational objectives

6.9 Explain why the tax implications of transfer pricing are important for a multinational entity,
and list the five methods that can be used.
Multinational entities may select their transfer pricing methods so that they are acceptable to the
local tax authorities rather than choosing the method that supports their organisational objectives
and strategies. In this situation, organisations look for a transfer price that will minimise the tax
they owe by shifting profits from countries with high tax rates to ones with lower tax rates. In
addition, they may wish to avoid resident withholding tax on dividends or gain dividend
imputation advantages, or maximise foreign tax credits.
There are five transfer pricing methods that, in general, an organisation can legally use. These
are:
1. Comparable uncontrolled price (CUP)
2. Resale price method (RPM)
3. Profit split method
4. Cost plus (CP)
5. Comparable profits (CPM).

6.10 Outline the role of activity-based costing in transfer pricing.

In uncertain environments where there is no market price, the use of actual cost-based transfer
prices is preferable. However, obtaining accurate cost information is a problem. The use of
activity-based costing potentially solves this problem and provides accurate information about
cost types and drivers, and the activities involved in each organisational unit. Further, activity-
based costing allows for improved internal relationships between the purchasing and selling units,
as it provides an understanding of the drivers of cost and underlying activities, as well as
supplying a common information base. Activity-based information therefore provides a
meaningful basis for negotiation and managing relationships, particularly if using a negotiated
transfer pricing method. The purchasing and selling units can analyse the data together, providing
for better communication and greater transparency, as well as providing cost management
information to allow the selling organisational unit to lower its costs.

6.11 Examine how the risks related to sub-optimisation or a lack of organisational goal
congruence, and internal organisational unit competition can influence the achievement of
an organisation’s objectives.
Sub-optimisation or a lack of goal congruence is where each of the independent organisational
unit’s transfer prices are set in such a way by its management so as to maximise organisational

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 Structural choices, transfer pricing and risk management

unit profits. However, organisational-unit profit maximisation can adversely affect organisation
profits and thus affect organisational value and owner wealth. Such a focus leads to the objectives
of the organisation being placed second to organisational unit objectives. This generally happens
because there is imperfect competition in the external market. That is, the purchase price from the
external market is greater than the selling units’ variable cost but less than its full cost, or it is
manipulated by organisational unit mangers. One reason for unit managers’ manipulation is that
if the units’ performance evaluation is based on the amount of profit that the organisational unit
earns, then unit managers tend to maximise their profit at the expense of other units and
organisational value. To achieve this maximisation, managers will demand a high transfer price
when selling and a low transfer price when buying. This will cause conflict within the
organisation and can lead to a lack of goal congruency and to sub-optimal behaviour.
Due to the problem of sub-optimisation and the lack of goal congruence, management may be
tempted to dictate the transfer price. This reduces the autonomy of the profit centre. Most text-
books recommend that organisational unit autonomy – that is, the right for managers to make
their own decisions – should be respected even if it results in sub-optimisation. However, is this
in the best interests of the organisation as a whole, especially in relation to transfer pricing’s aim
of motivating organisational unit managers to achieve the organisation’s goals, objectives and
associated strategies?

Transfer pricing can also be used to enhance internal organisational unit competition, as it is
argued that a lack of internal competition between organisational units can be unhealthy. This is
because organisational units may become complacent, fail to keep up with technological and
external environmental changes, and are less likely to attempt to control costs. Internal
competition, however, can potentially reduce co-ordination and co-operation between
organisational members, leading to conflict and disputes. In organisations with high levels of
decentralisation, competition among profit centres, although encouraging unit-management skill
development, autonomy and conformity, can lead to conflict and distorted communications that
distance organisational unit managers from higher-level managers. In this situation, transfer
pricing and accounting provide high-level managers with an image that in the short term the
organisation is performing well. However, the competition encouraged by transfer pricing
mechanisms can be detrimental to the achievement of the long-term organisational objectives. As
a way of mitigating this organisational non-value-adding behaviour, management meetings can
be used to resolve conflicts. These meetings allow the sharing of knowledge related to the market
and earnings, and encourage reciprocity and interdependence between profit centre management.

Solutions to Transfer Pricing Problems

6.12 Coastal Manufacturing

(a) With no excess capacity, the minimum transfer price is $150 – the market price for Division
A. The maximum transfer price is $140, the price Division B can purchase the product for
externally. As the minimum transfer price is greater than the maximum price, the transfer
should not take place.

(b) With excess capacity, the minimum transfer price = $90 – the variable cost. The maximum
transfer price is $140, which is the price Division B can purchase the product for externally.
As the minimum transfer price is less than the maximum price, the transfer should take place
at a price between $90 and $140.

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 Structural choices, transfer pricing and risk management

6.13 Middle Island Custom Motorcycles

(a) Calculate the minimum transfer price that could be used for the transfer of the motorcycle
engines from the Engine Division to the Assembly Division. Briefly explain your answer.
The minimum transfer price is $3,000, the variable cost per unit, as the Engine Division has
excess capacity.

(b) If the senior management team at Middle Island Custom Motorcycles decided that its
divisions should use a negotiated transfer price, calculate the transfer price range that
should be used to determine the transfer price. Briefly explain your answer.
The range of possible prices would be between $3,000 and $4,250.
As the Engine Division has excess capacity, it does not have to forgo external sales to be able to
supply the Assembly Division; therefore, a transfer price of $3,000 will cover its variable costs of
manufacturing and is the theoretically optimum transfer price. However, anything over $3,000
will contribute to the Engine Division’s fixed costs and then profits.
The Assembly Division will be willing to purchase the engines internally if the price does not
exceed $4,250, the price for which it could potentially purchase the engines on the external
market.
Therefore, the two divisions should be willing to negotiate a transfer price between $3,000 and
$4,250. What the final transfer price will be depends on the relative power of the Engine Division
and Assembly Division managers.

(c) Outline the advantages and disadvantages of both a cost-based and a negotiated transfer
price approach and make a recommendation, with reasons, as to which transfer pricing
policy Middle Island Custom Motorcycles should use.
Advantages and disadvantages

Transfer price Advantages Disadvantages

type
Cost-based • Easy to use and understand • If variable cost is used, then
– Variable • Information available in purchasing unit makes a profit at
accounting system the expense of the selling unit
• Focuses attention on • If not at marginal/variable cost,
contribution margin and short- then sub-optimal economic
term usage of organisational decisions are made
facilities
Negotiated • Reflects responsibility and • Very time-consuming and
accountability given to requires frequent revisions
responsibility centre managers • Can cause conflict and
• Promotes goal congruence information manipulation
• Promotes profit-sharing between • Lack of goal congruence if one
units manager has more power
• Can result in decisions that do
not meet organisational
objectives

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 Structural choices, transfer pricing and risk management

Make a recommendation, with reasons, to the Middle Island Custom Motorcycle management.
I would recommend as a starting point a transfer price of $3,000, the variable cost. This is
because the Engine Division has spare or excess capacity and as it is the theoretically optimal
transfer price, it should optimise the economic decisions for the organisation as a whole. Further,
a cost-based transfer price is easy to use and understand and negates the qualitative disadvantages
of a negotiated transfer price.
However, as the Assembly Division will accrue all the benefits of such a transfer, Middle Island
Custom Motorcycle management may wish to use a cost-plus price, to shift some of the benefits
to the Engine Division.

6.14 Motherboards and tablet computers

(a) Calculate the minimum transfer price that the Motherboard Division would be prepared to
accept. Explain your answer.
The minimum transfer price depends on the number of micro-motherboards that are transferred
from the Motherboard Division to the Computer Division.
If it is 150,000 or less, then the optimal transfer price is $11.25, the variable costs. This is because
the Motherboard Division has spare capacity of up to 150,000 motherboards (300,000 – 150,000).
However, if what is required is more than 150,000, then the number of micro-motherboards in
excess of the 150,000 will need to be transferred at the market price of $22 less the avoidable
variable selling expenses ($0.75) = $21.25. This is because the Motherboard Division would need
to forgo some of its sales to the external market.

(b) Calculate the maximum transfer price that the Computer Division would be prepared to
accept. Explain your answer.
The maximum transfer price that the Computer Division would be prepared to pay is $21.50,
which is what it can purchase the equivalent micro-motherboards for on the external market.

(c) Discuss, giving reasons, whether the internal transfer should take place.
Yes, the transfer should take place, as both the selling (Motherboard) division variable cost and
market price are below what the Computer (purchasing) Division pays on the external market.
If the Computer Division requires 150,000 or fewer micro-motherboards, then the transfer should
take place at the theoretically optimal transfer price of $11.25, the variable cost per micro-
motherboard, or at some price negotiated between the minimum transfer price and the maximum
transfer price, if management wish to use a negotiated transfer pricing approach.
If the Computer Division requires more than 150,000 micro-motherboards, the first 150,000
should be transferred at the variable cost (or negotiated price), and the amount above at the selling
division’s market price ($22.00 – 0.75 = 21.25). Once the actual number of micro-motherboards
required was known, an average transfer price could be calculated.

(d) Describe how the transfer pricing between the two divisions might change if the
Motherboard Division was in Australia, and the Computer Division was in India.
The reasons for transfer pricing change when a multinational entity is involved. This is because
micro-motherboards are to be transferred across international borders. The focus shifts to the tax
implications of the transfer. Senior management may select their transfer pricing methods so that

Hunt, Fowler and Drennan (2013) © Pearson Page 8

 Structural choices, transfer pricing and risk management

they are acceptable to the local tax authorities rather than choosing the method that supports their
organisational objectives and strategies. This means that the organisational goals become
secondary to the tax risks.

The organisation will look for a transfer price that will minimise the tax they owe by shifting
profits from countries with high tax rates to ones with a lower tax rates. In addition, they may
wish to avoid resident withholding tax on dividends or gain dividend imputation advantages, or
maximise foreign tax credits.

6.15 Lifestyle Group

This solution has been reproduced with the permission of Ken Bates, Victoria University of Wellington.

(a) The key characteristics of a good transfer pricing system:

1. Motivate the division manager to make decisions that are congruent with the objectives
of the organisation as a whole – e.g. to maximise group profits or organisational value.
2. Enable reliable and accurate measurement of organisational unit performance and unit
manager’s performance.
3. Ensure that organisational unit authority and autonomy is preserved and motivation of
unit managers maximised.
4. Minimise tax within the law (for international transfer prices).
The current group transfer pricing rule is to make all intercompany transfers at full cost plus 20%.

Disadvantages of current transfer pricing rule

This TP rule is presumably meant to approximate to market prices, but this may not necessarily
lead to the theoretically optimum TP and hence may not lead to decisions that are optimal for the
group as a whole (characteristic 1). This TP will only be optimal if it does equate to market price
and the supplying division is operating at full capacity. If, as in the current case, the supplying
division has spare capacity it will not be optimum, as the optimum TP is variable cost.

The current TP rule is inflexible and will only lead to accurate measurement of divisional
performance if current market prices do happen to be at about cost plus 20% (characteristic 2).
Imposing an inflexible transfer pricing rule on “autonomous” managers could be argued to
undermine their divisional autonomy (characteristic 3) and remove any flexibility to amend prices
in response to changing market conditions (like a recession). Allowing divisional managers
complete autonomy to negotiate TPs would be more aligned with the spirit of giving divisional
managers full autonomy “to run their divisions like an independent business”.

(b) Calculation of the transfer price and key arguments the divisional managers could use.
The Frames division is presently operating at 70% of capacity and even if the intercompany
transfer took place, they would only be up to 90% of capacity. Therefore, no external sales will
be sacrificed in accepting intercompany transfers and hence there is no additional “opportunity
cost” to take into account. Fixed overhead costs are irrelevant because they are the same whether
or not the intercompany transfer takes place.

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 Structural choices, transfer pricing and risk management

Any transfer price above the variable cost of $17 is therefore beneficial to Frames. 1
The Pictures division can buy frames of similar quality in the external market for $30 and hence
would want to pay no more than $30 for intercompany transfers (perhaps less, to recognise the
savings that should apply to intercompany transfers).
The range for a negotiated transfer price would therefore be between $17 and $30 in current
circumstances. The price finally agreed upon would depend on the relative power and negotiating
skills of the divisional managers.
Ben Bright’s arguments for a TP of $33:
• Frames division will ‘soon’ be operating at full capacity and intercompany transfer will
displace full price sales at $33 – in such circumstances the theoretically optimum transfer
price is market price of $33.
• In any case, Lifestyle Group divisional managers are given autonomy to run their divisions
‘as independent businesses’ and hence current market price is the logical transfer price.
Ben Bright’s revised arguments for a TP of $30:
• It could be cheaper (for both divisions) to undertake an internal transfer and the saving
should be reflected in a price cheaper than the full market price of $33.
• The Group’s transfer pricing rule was full cost plus 20% = $25 x 1.2 = $30. This remains a
good approximation of market prices and should continue to apply.
• Pictures division’s only alternative supplier will charge $30, so why expect to pay Frames
anything less? Moreover, there would be less risk buying from Frames – the external
supplier has a poor credit rating and might go bust.
• A lower transfer price, e.g. at full cost or below, would undermine the notion of divisional
autonomy, de-motivate the Frames division manager and destroy the current divisional PM
system and bonus structure.
Geraldine Glum’s arguments for a TP of $17:

• General transfer pricing theory (e.g. Hirshliefer) states that the optimum transfer price is the
opportunity cost of the selling division. For a division that has spare capacity at present, the
opportunity cost will be the marginal (variable) cost of units transferred = $17.
• In such recessionary times, and a competitive external market for pictures, the lower the
intercompany transfer price the better as a lower external price should lead to increased
external sales volumes. In the interests of the group as a whole, Frames should transfer at
variable cost so that group profits can be maximised.
Arguments for a TP of between $17 and $25 (full cost):
• As Frames has spare capacity, any price above $17 enables the division to increase
contribution to fixed costs that will not change anyway. Hence some small premium (above
$17) enables Frames division to remain autonomous and enhance ROI.

Note: the above effectively covers the whole negotiating process – only key initial arguments are
needed to answer this question.
1
Note that if Ben Bright had already assumed that the intercompany transfer should take place at the Group
transfer price of full cost plus 20% and included this in his division’s budget, he will expect transfers to be at $30
and anything below this would threaten his bonus. Note also that later in the year, when he expects the division
to be operating at full capacity, he would expect to receive the market price of $33, less any saving from
intercompany trading.

Hunt, Fowler and Drennan (2013) © Pearson Page 10

 Structural choices, transfer pricing and risk management

(c) The most appropriate transfer price system to implement during the current recessionary
climate.
It is recommended that Lifestyle Group revises its transfer pricing policy and allows divisional
managers to negotiate their own transfer prices. This would be consistent with their policy of
divisional autonomy (characteristic 3) and would allow managers to make adjustments to TPs in
response to changes in market conditionals and capacity utilisation. Given that managers will be
negotiating “at arm’s length”, this is akin to them running independent businesses and should
result in accurate divisional performance measurement (characteristic 2).
This should lead to compromises that are in the interests of the group as a whole. In the current
case, a transfer price somewhere between $17 and $30 is likely to be negotiated. Any price above
$17 will enable Frames division to benefit from the utilisation of spare capacity and make an
incremental contribution to unchanged fixed costs. Any price below $30 enables Pictures to
reduce costs (compared with the external supplier’s price) and avoid the risk of buying from a
supplier that may go bust.
The lower the input price to Pictures, the more they can shave off the final selling price of
finished pictures; and a price reduction (in a competitive market) should lead to increased output
and possibly increased overall profitability for both divisions of the Lifestyle Group as a whole.
(The precise outcome will depend on the price elasticity of demand for the final product.)

The main deficiencies of the suggestion to use negotiated TPs are the extra time and costs that
will be involved in price negotiations and the fact that the TP will inevitably be above the
theoretically optimum price of $17 (variable cost), perhaps resulting in a higher external price for
pictures and possibly lower overall profits. It is expected that the benefits in respect of motivation
and preserved autonomy of divisional managers will outweigh these disadvantages.

Solutions to the Case Studies

6.16 Kiwi Cycles Group

This solution has been reproduced with the permission of Ken Bates, Victoria University of Wellington.

(a) Suggest the theoretically optimum transfer price for transfers of frames between the Frames
division and the Cycles division.
General transfer pricing theory (e.g. Hirshliefer) states that the optimum transfer price is the
opportunity cost of the selling division.
For a division that has spare capacity at present, the opportunity cost will be the marginal
(variable) cost of units transferred. For a division that is operating at full capacity, the opportunity
cost of its output is the variable cost plus lost contribution from external sales lost; this equates
with the external market price.
Unless Cycle division requires 7,000 frames or more, which will only happen if the selling price
that optimised contribution becomes $500, which seems unlikely, the Frames division will be
operating at below full capacity. Hence transfers should theoretically be at variable cost of $100.
(Full cost of $140, less fixed cost per frame of $40)

Hunt, Fowler and Drennan (2013) © Pearson Page 11

 Structural choices, transfer pricing and risk management

(b) Produce a revised contribution analysis and clearly state the price–volume combination that
now maximises the Cycle division’s contribution.
With frames transferred at $100 instead of $175, cycles division variable costs becomes $355
($430 – 75). [A full revised costing could be produced, but is not strictly necessary]
Revised contribution analysis for Cycles division:
Selling Price ($) 500 540 580 620
Variable Cost ($) 355 355 355 355
Contribution per cycle ($) 145 185 225 265
Sales demand 8,000 6,600 5,100 3,600
Total Contribution ($) 1,160,000 1,221,000 1,147,500 954,000

The optimum price–volume combination for Cycles division is now a price of $540 and unit sales
of 6,600, and this is expected to yield contribution of $1,221,000 .

(c) Outline the advantages and disadvantages of imposing the theoretically optimum transfer
price, as suggested in part (a) above, on divisional managers.
Advantages of this variable cost transfer price:
• Transfer at variable cost optimises profits for the Group. 2
• The lower (variable-cost) transfer price reduces Cycles’ input cost and results in a lower
sales price to external customers. This increases group revenues and contribution.

• It recognises that Frames division is operating with spare capacity and hence the only
additional cost caused by transfers to Cycles division (the incremental or relevant cost) is the
variable cost of manufacture. Making transfers at this “relevant cost” figure ensures that
Cycles division sets the correct price for the final sales of cycles.

Disadvantages of this variable cost transfer price:

Transfers at variable cost leave the Frames division as a cost centre making no profit on transfers
and not even a contribution to divisional fixed costs. In this situation it becomes more difficult to:

• Measure the economic performance of the Frames division.

• Motivate the divisional manager.
In this case, the previous autonomy given to the Frames division manager will be removed and
any chance of a bonus will be lost, leading to demotivation and even a dispute over employment
terms.

(d) Suggest one alternative transfer pricing solution for Kiwi Cycles Group and advise
management on its advantages and disadvantages compared with the theoretically optimum
transfer price suggested in part (a) above.
Students could suggest one of the following:
• Cost plus transfer price, with sufficient ‘plus’ to allow a profit.

2
Cycles’ contribution raised to $1,221,000 but frames contribution from internal transfers fall to nil. Frames still
makes $60,000 contribution from external sales ((160 – 100) x 1,000 frames), so total group contribution is
$1,282,000. An increase in Group contribution of $73,500.

Hunt, Fowler and Drennan (2013) © Pearson Page 12

 Structural choices, transfer pricing and risk management

• Transfer price based on market prices. (So $160, or a little less to reflect lower selling
costs of interdivisional transfers).
• Negotiated transfer pries. (should end up between $100 and $160, depending on power
balance and negotiating skills of managers.)
Key advantages and disadvantages to look for are in line with the characteristics of a good
transfer pricing system as follows (see also the answer to question 6.8):
1. Motivate the division manager to make decisions that are congruent with the objectives of
the group as a whole – e.g. to maximize group profits.
2. Enable reliable and accurate measurement of divisional performance.
3. Ensure that divisional authority and autonomy are preserved and motivation of divisional
managers is maximised.

Example answer:
To avoid turning Frames division into a cost centre for internal transfers and undermining
divisional autonomy (and rendering the current rewards scheme based on profits useless), it will
probably be best to find some compromise transfer price that enables Frames make at least a
contribution to its fixed overheads and perhaps some profit.

Perhaps the external market price of $160 would be a good compromise transfer price,
encouraging Frames to be efficient and produce at a competitive cost.
The key advantages of using the market price as the transfer price for Frames is that it will
increase the profitability of the Frames division and preserve divisional autonomy (and the
incentive scheme based on profits), thus enabling the economic performance of the division to be
measured (against an external benchmark of market prices). The disadvantage is that it will not be
the theoretically optimum price and will increase the input cost to Cycles division, and therefore
might cause the selling price of cycles to outside customers to rise (and the quantity sold to fall).
This may ultimately reduce overall profitability of the group. Perhaps a transfer price a little
below normal market prices should be used, as it ought to be cheaper for transfers to be made
within the group than in the external market (no marketing costs, credit risk, etc.), and this will
avoid some of the upward pressure on the final price.
Note that there is not one “correct” answer to the transfer pricing problem, and hence alternative
recommendations are acceptable as long as they are well justified. Losing up to $73,500 extra
contribution (a 6% increase) may seem a high price to pay to preserve divisional autonomy for
Frames, so a transfer price at variable cost plus a small amount might be acceptable so long as the
rewards scheme was revised so that divisional managers were rewarded on overall group profits
instead of the profits of their own divisions. This would focus managers on “group performance”
and encourage “teamwork” instead of competition between them.

Hunt, Fowler and Drennan (2013) © Pearson Page 13

 Structural choices, transfer pricing and risk management

6.17 Yummy Food Company

(a) Analysing Yummy’s financial situation:

The new proposal will have the following financial impact on Yummy:

Increase in packaging cost: (50,000 × $7) + (10,000 × $9) = $440,000. This means that Yummy’s
profit will reduce by $440,000. In addition, Yummy will have to manage three supplier
relationships instead of one, and by referencing their activity-based costing system, overhead
costs related to the supply chain are likely to increase also.

The MD recognises that the share of profit attributable to the minority shareholder in PoPo will
increase by $125,000 (one quarter of $500,000) and the majority shareholder will equity account
an increase of $375,000 as a result. Overall, the consolidated profit would be expected to decline
by at least ($440,000 – $375,000) = $75,000. The MD expects that the minority shareholder in
PoPo will pressure to accept the new business and require Yummy to seek alternative sources for
their packaging, and since they hold an influential board seat, that argument will be fierce! On
what grounds could this argument be rejected?

(b) How to solve this dispute

How to solve this dispute is challenging, more so because of the presence of the substantial and
influential minority shareholder.

Without this influence, the decision would be more straightforward: provided PoPo covers its
direct costs, it is economically better to sell within the group, because the fixed costs are
unavoidable in the short term. However, where an external selling opportunity exists that is better
for the selling company, they should be allowed to accept this opportunity if they are evaluated as
an investment centre, which, given the shareholding situation, they certainly would be. The
buying company should be required to meet the market ($100 in this instance) or seek alternative
supply elsewhere, also allowing it the freedom of making its own decisions consistent with being
an investment centre. This suggests that the optimal economic solution for the group is not likely
to satisfy either of the respective CEOs, nor will it satisfy the minority shareholder.

The MD could pursue a negotiation around the fact that the market is now likely to move to $100,
so if Yummy meets the market price with PoPo supplying, then the only remaining issue would
be the non-financial difficulties that are incurred in dealing with Yummy – the extreme variability
of its order pattern.

Yummy would do well to investigate the capacity of ‘supplier 3’ to continue to provide at $95,
which appears to be below the market price of the near future. How permanent is that price, and
what capacity does supplier 3 have to continue to meet all or part of Yummy’s needs? If ‘supplier
3’ appears reliable and particularly if it has further capacity, Yummy would do well to switch to it
for 100% of its supply, and then PoPo can accept the new contract at $100 with no ill-feelings
within the group. The MD would need to ask Yummy’s CEO to ascertain the reliability and price
of supplier 3’s product immediately. Without this information about alternative sources, the basis
of any decision is not incomplete.

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 Structural choices, transfer pricing and risk management

One further question not explored here is the possibility of different tax regimes for the two
companies. If there is a tax advantage within Vietnam, that would further skew the decision
towards PoPo accepting the profit-increasing solution because of differential tax treatments.

What we can conclude from this discussion is that transfer pricing solutions have both financial
and non-financial elements. When all the financial information is to hand, we can model the
profit situation, but that does not accommodate the non-financial impacts and, most importantly,
the motivational impacts of forcing decisions on managers who may have other incentives in
place.

********

Hunt, Fowler and Drennan (2013) © Pearson Page 15

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 The Project Gutenberg eBook of Chambers's
Journal of Popular Literature, Science, and Art,
Fifth Series, No. 115, Vol. III, March 13, 1886
 This ebook is for the use of anyone anywhere in the United
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Title: Chambers's Journal of Popular Literature, Science, and

Art, Fifth Series, No. 115, Vol. III, March 13, 1886

Author: Various

Release date: May 14, 2022 [eBook #68073]

Language: English

Original publication: United Kingdom: William and Robert

Chambers, 1853

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*** START OF THE PROJECT GUTENBERG EBOOK

CHAMBERS'S JOURNAL OF POPULAR LITERATURE, SCIENCE,
AND ART, FIFTH SERIES, NO. 115, VOL. III, MARCH 13, 1886 ***
 CHAMBERS’S JOURNAL
OF
POPULAR
LITERATURE, SCIENCE, AND
ART.
 CONTENTS
THE MONARCH OF AFRICAN MOUNTAINS.
IN ALL SHADES.
DUST AND HOUSE REFUSE: SHOWING WHAT BECOMES OF IT.
THE HAUNTED JUNGLE.
A NIGHT-RAID ON DONEGAL SMUGGLERS.
SOME FAROE LEGENDS.
THE OLD VIKING.
No. 115.—Vol. III. SATURDAY, MARCH 13, 1886. Price 1½d.
 THE MONARCH OF AFRICAN
MOUNTAINS.
To those who associate the name of the great African continent only
with visions of the steaming mangrove swamps of the west coast,
the luxuriant flower-carpets and grasses of the south, the trackless
sand-wastes of the north, and the undulating thirsty plains of ‘the
Bush,’ whose idea of Africa, indeed, may be summed up in three
words—sun, savages, and fever—to such, we say, it may be difficult
to accept the knowledge that snow-capped mountains exist in the
very heart of this dry and heat-engirdled land. But yet, there have
been for ages, strange tales of a wonderful mountain-mass in the
tropical centre, whose summit was perpetually covered with a
mysterious substance which the natives called ‘white salt.’ Now, as
perpetual snow under the equator was known only in Central
America—nowhere else do mountains in the tropics reach the snow-
line—there did exist for ages incredulity as to the existence of this
alleged African Mont Blanc or Chimborazo. The legend referring to it
must have been known to the early Portuguese travellers at least
three centuries ago, for the Portuguese were at Mombasa in the
sixteenth century, and as Mombasa is within one hundred and eighty
miles of the mountain, and is the coast-limit of the trade-route
between it and the sea, they must have heard the stories of the
native and Arab traders. Others believed this Kilima-Njaro[1] to be
merely the legendary ‘Mountains of the Moon.’
The earliest authentic record of ‘discovery’ by a European is that of
Rebmann, a German missionary, who, on the 11th of May 1848, first
sighted the wonderful snowy dome. Baron Von der Decken, another
German, actually reached Kilima-Njaro in 1861, and stayed on its
slopes for some three months. On a second visit, Von der Decken
ascended to a height of ten thousand five hundred feet, although he
did not reach the snow. He was followed, in 1871, by an English
missionary, the Rev. Charles New, who made two journeys to Chaga
—the native name for the inhabited belt between three and seven
thousand feet above the sea, stretching round the mountain—and on
the second occasion was robbed and ill-used by Mandara, a native
chief. Mr Joseph Thomson, after making the journey Through Masai-
land, of which he has published so interesting an account, arrived at
Kilima-Njaro in 1883. He journeyed nearly all round the base of the
mountain, but did not ascend more than nine thousand feet. He also
was robbed by Mandara.
It was reserved for Mr H. H. Johnston, F.R.G.S., to penetrate the
mysteries of the ‘Monarch of African Mountains,’ and to record his
experiences in a most interesting book, The Kilima-Njaro Expedition
(London: Kegan Paul). Mr Johnston’s experiences on the Congo
qualified him for African exploration; while his services to science in
other parts of the world, pointed him out as well equipped for the
search into and observation of the natural history of the locality,
selected for exploration by a joint-committee of the British
Association and the Royal Society. To solve the many interesting
problems surrounding the fauna and flora of this African alpine
region, was the task delegated to Mr Johnston. He left London in
March 1884, and in due course arrived at Zanzibar, where he was
assisted by Sir John Kirk in getting together a band of porters,
servants, and guides. After some delay at Mombasa, caused by a
sharp attack of fever, Mr Johnston plunged into the wilderness at the
head of his long band of porters, carrying loads of domestic
necessaries, provisions, water, and ‘trade’ goods. The long tramp
inland was a weary one, for it was through a hot and thirsty land,
which sorely tried the endurance of the party.
The first glimpse of Kilima-Njaro was obtained long before the party
reached its base. And here it may be proper to explain that this
name is given to the whole mountain-mass, which consists of two
huge peaks and a number of smaller ones, just below the third
parallel south of the equator. The highest of the peaks is called Kibô,
is eighteen thousand eight hundred and eighty feet above the level
of the sea, and is always covered with snow on the top, and
occasionally down to the altitude of fourteen thousand feet. This is,
so far as is at present known, the highest mountain in Africa. The
twin-peak, Kimawenzi, is sixteen thousand two hundred and fifty feet
high, and although above the snow-line, is not continuously snow-
clad. The whole mass is of volcanic origin, and the two peaks are the
craters of extinct volcanoes.
Approached from the south-east, the mountain has the appearance
of lonely isolation, and presents a truly remarkable spectacle, with its
peaks towering to the clouds and its glittering snow-caps. It is worth
while giving in Mr Johnston’s words his emotions on first gaining
sight of the goal of his desires: ‘With the falling temperature of the
small-hours, a brisk wind arose from the heated plain, and swept the
clouds from off the sky, all except the mass which obstinately clung
to Kilima-Njaro. Feverish and overtired, I could not sleep, and sat
and watched the heavens, waiting for the dawn. A hundred men
were snoring around me, and the night was anything but silent, for
the hyenas were laughing hideously in the gloom outside our circle
of expiring embers. At five o’clock I awoke my servant Virapan, and
whilst he was making my morning coffee I dropped into a doze, from
which at dawn he roused me and pointed to the horizon, where in
the north-west a strange sight was to be seen. “Laputa,” I exclaimed;
and as Virapan, though he had read Robinson Crusoe and the
Arabian Nights in his native tongue, had never heard of Gulliver’s
Travels, I proceeded to enlighten him as to the famous suspended
island of Swift’s imagining, and explained my exclamation by
pointing to the now visible Kilima-Njaro, which, with its two peaks of
Kibô and Kimawenzi, and the parent mass of mountain, rose high
above a level line of cloud, and thus completely severed in
appearance from the earth beneath, resembled so strangely the
magnetic island of Laputa.’
It was not until the thirteenth day after leaving Mombasa, that the
party entered the state of Mosi, ruled over by the chief Mandara,
already mentioned. This little kingdom is of about the same area as
London, and is on the lower slope of the mountain, between three
and four thousand feet above the sea. Splendid views are obtained
from it over the plains below, and its condition is anything but one of
savagery. The agriculture is of a high order, and the people, although
nearly naked, are both intelligent and industrious. The fields are well
intersected by artificial water-courses, led from the mountain-
streams higher up, and ‘the air is musical with the murmur of trickling
rivulets and the tinkling bells of the flocks and herds.’ Wherever the
ground is not in cultivation, it is covered with brilliantly coloured wild
flowers of numberless known and unknown species; the hum of bees
is suggestive of endless stores of honey; and the flow of milk is
guaranteed by the innumerable herds of mild-eyed kine cropping the
rich pasture.
Finding that the feuds between the Mosi people and the other
mountain tribes were a bar to his progress through Mandara’s
country, Mr Johnston withdrew, and negotiated treaties of peace and
commerce with one of the rival potentates whose territory extended
nearer the summit. Before doing this, however, he had to retire to a
place called Taveita, through which he had passed on his way to
Mandara’s. Of this place he says: ‘From the day of my first arrival up
to the time of my final departure, it seemed to me one of the loveliest
spots on the earth’s surface.’
Taveita is the sort of trade centre of the district, and is ruled over by
a senate of notables, called the ‘Wazēē,’ or elders, who preserve law
and order, and arbitrate in disputes between the resident natives and
the nomadic traders. Its population is about six thousand.
From Taveita, Mr Johnston negotiated with the chief of Maranū state
rather larger than Middlesex, on the south-eastern flank of the
mountain. After many preliminaries and much exchanging of
presents, he was at length admitted into this kingdom, and had
positively to crawl into it through the defensive stockades, which it
seems the custom in this country for the separate peoples to erect
around their domains. Between the kingdom of Maranū and the
summit of Kibô, there lay no opposing tribe, so that, having obtained
guides, Mr Johnston was, after a little delay, enabled to continue his
journey to the snow.
The route crossed a fine river, and lay at first through a smiling and
fertile country, with signs of cultivation and flourishing banana-groves
up to an altitude of five thousand five hundred feet. Shortly after that,
cultivation ceased, and a heathy district was reached, with grassy
knolls and numerous small streams of running water. The ascent
was very gradual, and the first night was spent in camp at six
thousand five hundred feet. Leaving this, a dense forest was
reached at seven thousand feet; then a district of uplands thickly
covered with moss and ferns, studded with short gnarled trees, and
teeming with begonias and sweet-scented flowering shrubs, but with
few signs of animal life. At nine thousand feet, the region was clear
of forests, and merely covered with grass; but higher up, the
woodland began again, and water became very abundant. The third
camp was formed at ten thousand feet, and here the party
encountered a terrific thunderstorm and rainfall. It was succeeded by
a fair and serene morning, leaving the two snow-peaks in full view
against a cloudless blue sky. At this point Mr Johnston resided nearly
a month, actively prosecuting his collecting and observing, and
preparing for the final ascent. Then, one day, with three followers
only, he started for great Kibô.
For some two thousand feet higher, vegetation is abundant; and
even at twelve thousand six hundred feet the party struck a pretty
little stream, on the banks of which were patches of level greensward
and abundance of gay flowers, while the spoor of buffaloes was also
observed. Strange sessile thistles, five feet in circumference, were
noticed; and an extraordinary lobelia, between three and four feet in
height, with bright-blue blossoms, as also other remarkable plants.
Bees and wasps were still to be seen at this high altitude, and bright
little sunbirds darting about. But beyond thirteen thousand feet,
vegetation was seen only in dwarfed patches, and the ground
became covered with boulders, lying in confused masses, with
occasional huge slabs of rock, singularly marked like tortoise-shells.
At thirteen thousand six hundred feet, the last resident bird was
noticed—a species of stonechat—although high-soaring kites and
great-billed ravens were seen even higher up. At fourteen thousand
one hundred and seventeen feet, the Zanzibari followers were
thoroughly done up, and began to show unmistakable signs of fear
of the ‘bogey’ of the mountain, so they were left to prepare a
sleeping-place for the night, while Mr Johnston continued the ascent
alone.
At fifteen thousand one hundred and fifty feet he reached the central
connecting ridge of Kilima-Njaro, and could see part of both sides.
The ‘Monarch,’ however, was veiled in clouds. What followed cannot
better be given than in the adventurer’s own words: ‘At length—and
it was so sudden and so fleeting, that I had no time to fully take in
the majesty of the snowy dome of Kibô—the clouds parted, and I
looked on a blaze of snow so blinding white under the brief flicker of
sunlight, that I could see little detail. Since sunrise that morning I had
caught no glimpse of Kibô, and now it was suddenly presented to me
with unusual and startling nearness.... Knowing now the direction of
my goal, I rose from the clammy stones, and clutching my sketch-
book with benumbed hands, began once more to ascend westwards.
Seeing but a few yards in front of me, choked with mist, I made but
slow progress; nevertheless, I continually mounted along a gently
sloping, hummocky ridge, where the spaces in between the masses
of rock were filled with fine yellowish sand. The slabs of rock were so
slippery with the drizzling mist, that I very often nearly lost my
footing, and I thought with a shudder what a sprained ankle would
mean here.
‘At length, after a rather steeper ascent than usual up the now
smoother and sharper ridge, I suddenly encountered snow lying at
my very feet, and nearly plunged headlong into a great rift filled with
snow, that here seemed to cut across the ridge and interrupt it. The
dense mist cleared a little in a partial manner, and I then saw to my
left the black rock sloping gently to an awful gulf of snow, so vast and
deep that its limits were concealed by fog. Above me a line of snow
was just discernible, and altogether the prospect was such a gloomy
one, with its all-surrounding curtain of sombre cloud, and its
uninhabited wastes of snow and rock, that my heart sank within me
at my loneliness.... Turning momentarily northwards, I rounded the
rift of snow, and once more dragged myself, now breathless and
panting, and with aching limbs, along the slippery ridge of bare rock,
which went ever mounting upwards.... The feeling that overcame me
when I sat and gasped for breath on the wet and slippery rocks at
this great height, was one of overwhelming isolation. I felt as if I
should never more regain the force to move, and must remain and
die amid this horrid solitude of stones and snow. Then I took some
brandy-and-water from my flask, and a little courage came back to
me. I was miserably cold, the driving mist having wetted me to the
skin. Yet the temperature recorded here was above the freezing-
point, being thirty-five degrees Fahrenheit.... The mercury rose to
183.8. This observation, when properly computed, and with the
correction added for the temperature of the intermediate air, gives a
height of sixteen thousand three hundred and fifteen feet as the
highest point I attained on Kilima-Njaro.’
When he returned to the camping-place, Mr Johnston found that his
three followers had deserted him, being thoroughly terrified, and
certain that the white man had perished on the lonely heights. With
much difficulty he made his way to the station on the lower ground,
where the great body of his attendants had remained; and in due
course the whole party arrived safely again at Taveita. From there a
new route was taken, by way of Lake Jipé, to the coast at Pangani,
where the followers were paid off. An English mission afforded Mr
Johnston shelter until he could get a passage on an Arab dau to
Zanzibar, where he caught the mail-steamer; and in little more than
six weeks after getting his last glimpse of the snow-peaks of Kilima-
Njaro, from the shores of Lake Jipé, the gallant explorer was in
London once more.
Although attaining the highest altitude yet reached by man in Africa,
Mr Johnston did not complete the conquest of Kilima-Njaro. But he
reached within two thousand feet of the summit; and having shown
the way, it will be odd if some of the adventurous spirits among
alpine climbers do not essay the task of peering into the hidden
depths of the crater of Kibô. Be this as it may, the expedition has
resulted in the acquisition of a vast amount of valuable information
about the geography, the fauna, and flora of this strange district,
where in two days you can ascend from equatorial heat to arctic
cold. Even in the plains, the temperature is, for six months in the
year, quite bearable, and in some parts delightful. The extreme
fertility of the mountain slopes, the abundance of game, the stores of
ivory to be obtained from the vast herds of elephants, the rare and
beautiful skins—in short, all the known riches of animal and
vegetable production, and the supposed existence of mineral
deposits, such as copper and nitrate of soda, point to this district as
destined to play an important part in the future of Africa.
 IN ALL SHADES.
CHAPTER XIII.
‘Father, father,’ Dr Whitaker whispered in a low voice, ‘let us go
aside a little—down into my cabin or somewhere—away from this
crowd here. I am so glad, so happy to be back with you again; so
delighted to be home once more, dear, dear father. But don’t you
see, everybody is looking at us and observing us!’
The old mulatto glanced around him with an oily glance of profound
self-satisfaction. Yes, undoubtedly; he was the exact centre of an
admiring audience. It was just such a house as he loved to play to.
He turned once more to his trembling son, whose sturdy knees were
almost giving way feebly beneath him, and redoubled the ardour of
his paternal demonstrativeness. ‘My son, my son, my own dear boy!’
he said once more; and then, stepping back two paces and opening
his arms effusively, he ran forward quickly with short mincing steps,
and pressed the astonished doctor with profound warmth to his
swelling bosom. There was an expansiveness and a gushing
effusion about the action which made the spectators titter audibly;
and the titter cut the poor young mulatto keenly to the heart with a
sense of his utter helplessness and ridiculousness in this absurd
situation. He wondered to himself when the humiliating scene would
ever be finished. But the old man was not satisfied yet. Releasing his
son once more from his fat grasp, he placed his two big hands
akimbo on his hips, puckered up his eyebrows as if searching for
some possible flaw in a horse or in a woman’s figure—he was a
noted connoisseur in either—and held his head pushed jauntily
forward, staring once more at his son with his small pig’s eyes from
top to toe. At last, satisfied apparently with his close scrutiny, and
prepared to acknowledge that it was all very good, he seized the
young doctor quickly by the shoulders, and kissing him with a loud
smack on either cheek, proceeded to slobber him piecemeal all over
the face, exactly like a nine-months’-old baby. Dr Whitaker’s cheeks
tingled and burned, so that even through that dusky skin, Edward,
who stood a little distance off, commiserating him, could see the hot
blood rushing to his face by the deepened and darkened colour in
the very centre.
Presently, old Bobby seemed to be sufficiently sated with this
particular form of theatrical entertainment, and turned round
pleasantly to the remainder of the company. ‘My son,’ he said, not
without a real touch of heart-felt, paternal pride, as he glanced
towards the gentlemanly looking and well-dressed young doctor,
‘your fellow-passengers! Introduce me! Which is de son of my ole
and valued friend, de Honourable James Hawtorn, of Wagwater?’
Dr Whitaker, glad to divert attention from himself on any excuse,
waved his hand quietly towards Edward.
‘How do you do, Mr Whitaker?’ Edward said, in as low and quiet a
tone as possible, anxious as he was to disappoint the little gaping
crowd of amused spectators. ‘We have all derived a great deal of
pleasure from your son’s society on our way across. His music has
been the staple entertainment of the whole voyage. We have
appreciated it immensely.’
But old Bobby was not to be put off with private conversation aside in
a gentle undertone. He was accustomed to living his life in public,
and he wasn’t going to be balked of his wonted entertainment. ‘Yes,
Mr Hawtorn,’ he answered in a loud voice, ‘you are right, sah. De
taste for music an’ de taste for beauty in de ladies are two tastes dat
are seldom wantin’ to de sons or de grandsons of Africa, however far
removed from de original negro.’ (As he spoke, he glanced back with
a touch of contempt and an infinite superiority of manner at the pure-
blooded blacks, who were now busily engaged in picking up
portmanteaus from the deck, and squabbling with one another as to
which was to carry the buckras’ luggage. Your mulatto, however
dark, always in a good-humoured, tolerant way, utterly despises his
coal-black brethren.) ‘Bote dose tastes are highly developed in my
own pusson. Bote no doubt my son, Wilberforce Clarkson Whitaker,
is liable to inherit from his fader’s family. In de exercise of de second,
I cannot fail to perceive dat dis lady beside you must be Mrs
Hawtorn. Sah’—with a sidelong leer of his fat eyes—‘I congratulate
you mos’ sincerely on your own taste in female beauty. A very nice,
fresh-lookin’ young lady, Mrs Hawtorn.’
Marian’s face grew fiery red; and Edward hardly knew whether to
laugh off the awkward compliment, or to draw himself up and stroll
away, as though the conversation had reached its natural ending.
‘And de odder young lady,’ Bobby went on, quite unconscious of the
effect he had produced—‘de odder young lady? Your sister, now, or
Mrs Hawtorn’s?’
‘This is Miss Dupuy of Orange Grove,’ Edward answered
hesitatingly; for he hardly knew what remark old Bobby might next
venture upon. And indeed, as a matter of fact, the old mulatto’s
conversation, even in the presence of ladies, was not at all times
restrained by all those artificial rules of decorum imposed on most of
us by what appeared to him a ridiculously strait-laced and puritanical
white conventionality.
But Edward’s answer seemed to have an extraordinary effect in
sobering and toning down the old man’s exuberant volubility; he
pulled off his hat with a respectful bow, and said in a lower and more
polite voice: ‘I have de honour of knowing Miss Dupuy’s fader; I am
proud to make Miss Dupuy’s acquaintance.’
‘Here, Bobby!’ the captain called out from a little forward—‘you come
here, say. The first-officer wants to introduce you’—with a wink at
Edward—‘to His Excellency the Peruvian ambassador.—Look here,
Mr Hawthorn; don’t you let Bobby talk too long to your ladies, sir. He
sometimes blurts out something, you know, that ladies ain’t exactly
accustomed to. We seafaring men are a bit rough on occasion
ourselves, certainly; but we know how to behave for all that before
the women.—Bobby, don’t; you’d better be careful.’
‘Thank you,’ Edward said, and again felt his heart smitten with a sort
of remorse for poor Dr Whitaker. That quick, sensitive, enthusiastic
young man to be tied down for life to such a father! It was too
terrible. In fact, it was a tragedy.
‘Splendid take-down for that stuck-up, young brown doctor,’ the
English officer exclaimed aside in a whisper to Edward. ‘Shake a
little of the confounded conceit out of him, I should say. He wanted
taking down a peg.—Screaming farce, isn’t he, the old father?’
‘I never saw a more pitiable or pitiful scene in my whole life,’ Edward
answered earnestly. ‘Poor fellow, I’m profoundly sorry for him; he
looks absolutely broken-hearted.’
The young officer gazed at him in mute astonishment. ‘Can’t see a
joke, that fellow Hawthorn,’ he thought to himself. ‘Had all the fun
worked out of him, I suppose, over there at Cambridge. Awful prig!
Quite devoid of the sense of humour. Sorry for his poor wife; she’ll
have a dull life of it.—Never saw such an amusing old fool in all my
days as that ridiculous, fat old nigger fellow!’
Meanwhile, James Hawthorn had been standing on the wharf,
waiting for the first crush of negroes and hangers-on to work itself
off, and looking for an easy opportunity to come aboard in order to
meet his son and daughter. By-and-by the crush subsided, and the
old man stepped on to the gangway and made his way down upon
the deck.
In a moment, Edward was wringing his hand fervently, and father
and son had exchanged one single kiss of recognition in that half-
shamefaced, hasty fashion in which men of our race usually get
through that very un-English ceremony of greeting.
‘Father, father,’ Edward said, ‘I am so thankful to see you once more;
so anxious to see my dear mother.’
There were tears standing in both their eyes as his father answered:
‘My boy, my boy! I’ve denied myself this pleasure for years; and now
—now it’s come, it’s almost too much for me.’
There was a moment’s pause, and then Mr Hawthorn turned to
Marian. ‘My daughter,’ he said, kissing her with a fatherly kiss, ‘we
know you, and love you already, from Edward’s letters; and we’ll do
our best, as far as we can, to make you happy.’
There was another pause, and then the father said again: ‘You didn’t
get my telegram, Edward?’
‘Yes, father, I got it; but not till we were on the very point of starting.
The steamer was actually under weigh, and we couldn’t have
stopped even if we had wished to. There was nothing for it but to
come on as we were, in spite of it.’
‘Oh, Mr Hawthorn, there’s papa!’ Nora cried excitedly. ‘There he is,
coming down the gangway.’ And as she spoke, Mr Dupuy’s portly
form was seen advancing towards them with slow deliberateness.
For a second, he gazed about him curiously, looking for Nora; then,
as he saw her, he walked over towards her in his leisurely, dawdling,
West Indian fashion. Nora darted forward and flung her arms
impulsively around him. ‘So you’ve come, Nora,’ the old gentleman
said quietly, disembarrassing himself with elephantine gracefulness
from her close embrace—‘so you’ve come, after all, in spite of my
telegram!—How was this, my dear? How was this, tell me?’
‘Yes, papa,’ Nora answered, a little abashed at his serene manner.
‘The telegram was too late—it was thrown on board after we’d
started. But we’ve got out all safe, you see.—And Marian—you know
—Marian Ord—Mrs Hawthorn that is now—she’s taken great care of
me; and, except for the hurricane, we’ve had such a delightful
voyage!’
Mr Dupuy drew himself up to his stateliest eminence and looked
straight across at Marian Hawthorn with stiff politeness. ‘I didn’t know
it was to Mrs Hawthorn, I’m sure,’ he said, ‘that I was to be indebted
for your safe arrival here in Trinidad. It was very good of Mrs
Hawthorn, I don’t doubt, to bring you out to us and act as your
chaperon. I am much obliged to Mrs Hawthorn for her kind attention
and care of you on the voyage. I must thank Mrs Hawthorn very
sincerely for the trouble she may have been put to on your account.
—Good-morning, Mrs Hawthorn!—Good-morning, Mr Hawthorn!
Your son, I suppose? Ah, so I imagined.—Good-morning, good-
morning.’ He raised his hat with formal courtesy to Marian, and
bowed slightly to the son and father. Then he drew Nora’s arm
carefully in his, and was just about to walk her immediately off the
steamer, when Nora burst from him in the utmost amazement and
rushed up to kiss Marian. ‘Papa,’ she cried, ‘I don’t think you