76 1584 125 1980 opportunity cost of shifting

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Unformatted text preview: .8) $25.76 $15.84 × 125 $1,980 Opportunity cost of shifting production to the economy office stool = $2,520 – $1,980 = $540. 2. Variable manufacturing cost plus opportunity cost would be the best transfer pricing system to use because it would allow the supplying division to be indifferent between selling the product internally to another division or selling the product in the external market. This transfer pricing method ensures that the supplying division’s contribution to profit would be the same under either alternative. The sum of the variable manufacturing cost and the opportunity cost represents the effort put forth by the supplying division to the overall well-being of the company. An appropriate transfer price must attempt to fulfill the company objectives of autonomy, incentive, and goal congruence. While no one transfer price can necessarily satisfy each of these objectives fully in all situations, the variable manufacturing cost plus opportunity cost transfer price should be the most appropriate method for meeting these objectives in most situations. 10–33 1. Many legitimate reasons support the creation of inventory (e.g., the need to avoid stockouts and the need to ensure on-time delivery). Paul Chesser’s reasons, however, are based on self-interest and ignore what’s best for the company. Knowingly producing for inventory to obtain personal financial gain at the expense of the company certainly could be labeled as unethical behavior. 2. Since the decision to produce for inventory was not motivated by any sound economic reasoning, and Ruth knows the real motive behind the decision, she should feel discomfort in the role she has been asked to assume. If she 344 decides to appeal to higher-level management, the divisional manager can counter with arguments that inventory was created because he expected the economy to turn around and did not want to be in a position of not having enough goods to meet demand. Even though Ruth may have a difficult time proving any allegation of improper conduct, if she is convinced that the behavior is truly unethical, then appeals to higher-level management with the prospect of ultimate resignation should be the...
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