Transfer pricing, general guideline, goal congruence (CMA, adapted)
Nogo Motors, Inc, operates as decentralized multi division company. The Igo Division of Nogo Motors purchases most of its airbags from the Airbag Division. The Airbag Divisions incremental costs for manufacturing the airbags are $110 per unit. The Airbage Division is currently working at 80% of capacity. The current market price of the airbags is $140 per unit.
1. Using the general guideline presented in the chapter, what is the minimum price at which the Airbag Division would sell airbags to the Igo Division?
2. Suppose that Nogo Motors requires that whenever divisions with idle capacity sell products internally, they must do so at incremental costs. Evaluate this transfer-pricing policy using the criteria of goal congruence, evaluation division performance, motivating management effort, and preserving division autonomy.
3. If the two division were to negotiate a transfer price, what is the range of possible transfer prices? Evaluate this negotiated transfer-pricing policy using the criteria of goal congruence, evaluation division performance. motivation management effort, and preserving division autonomy.
4. Do you prefer the transfer-pricing policy in requirement 2 or requirement 3? Explain your answer briefly
1. Using the general guideline presented in the chapter, the minimum price at which the Airbag Division would sell airbags to the Igo Division is $110, the incremental costs. The Airbag Division has idle capacity (it is currently working at 80% of capacity). Therefore, its opportunity cost is zero?the Airbag Division does not forgo any external sales and as a result, does not forgo any contribution margin from internal transfers. Transferring airbags at incremental cost achieves goal congruence.
2. Transferring products internally at incremental cost has the following properties:
a. Achieves goal congruence?Yes, as described in requirement 1 above.
b. Useful for evaluating division performance?No, because this transfer price does not cover or exceed full costs. By transferring at incremental costs and not covering fixed costs, the Airbag Division will show a ...
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