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Since the transfer price can affect firmwide

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Unformatted text preview: e transfer price can affect firmwide profitability, higher management may be tempted to interfere with the autonomy of a division and dictate the price (rather than letting the divisional manager make the pricing decision). Negotiated transfer prices allow both divisions to be made better off whenever opportunity costing signals that a transfer should take place. Because both can be made better off, no interference from headquarters is needed. Moreover, the price emerging is necessarily a mutually satisfactory price. In effect, negotiated prices can simultaneously satisfy the objectives of accurate performance evaluation, firmwide efficiency, and preservation of divisional autonomy. Disadvantages of negotiated transfer prices are that (1) private information can be used for exploitation, (2) performance measures are distorted by relative negotiating skills of managers, and (3) it is costly. Three cost-based transfer prices are full cost, full cost plus markup, and variable cost plus fixed fee. Disadvantages are that prices may not reflect the optimal outcome for the divisions and for the firm. Specifically, it is possible for the transfer price using one of the costing approaches to be less than the minimum price and greater than the maximum price. The prices, however, are simple to use and, in some cases, may reflect the outcome of a negotiated agreement. A transfer price is the price charged for goods that are transferred from one division to another. 19. Market price. Minimum price = Maximum price = Market price. Any other price would make at least one division worse off, and firm profits may decrease if the price is not market price. 23. Owners may have difficulty developing goal congruence with managers because managers may not want to work as hard as the owner would like and because managers may wish to use the company’s resources for their own benefit. Properly structured incentive pay plans may be successful in overcoming these problems. Agree. At least one...
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