12 - 22-20(Cont'd.)2.Bonus paid to division managers at 1%...

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Unformatted text preview: 22-20(Cont'd.)2.Bonus paid to division managers at 1% of division operating income will be as follows:Method AInternal Transfers at Market PricesMethod BInternal Transfers at 110% of Full CostsMining Division manager's bonus(1% $12,000,000; 1% $2,400,000) $120,000$ 24,000Metals Division manager's bonus(1% $3,600,000; 1% $13,200,000)36,000132,000The Mining Division manager will prefer Method A (transfer at market prices) because this method gives $120,000 of bonus rather than $24,000 under Method B (transfers at 110% of full costs). The Metals Division manager will prefer Method B because this method gives $132,000 of bonus rather than $36,000 under Method A.3.Brian Jones, the manager of the Mining Division, will appeal to the existence of a competitive market to price transfers at market prices. Using market prices for transfers in these conditions leads to goal congruence. Division managers acting in their own best interests make decisions that are also in the best interests of the...
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This note was uploaded on 02/05/2012 for the course ACCOUNTING acct 504 taught by Professor Dehmal during the Spring '10 term at DeVry Pittsburgh.

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12 - 22-20(Cont'd.)2.Bonus paid to division managers at 1%...

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