assigned or accounted for in order that each decentralized division has

Assigned or accounted for in order that each

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assigned, or accounted for in order that each decentralized division has incentive not to forego firm-value enhancing actions in the pursuit of myopic division profits? As illustrated in the context of the Royal Resort and Casino, an accounting system usually can not economically capture and report all the synergies. b. One such interdependency is junkets. Entertainment and Hotel operations might appear to be unprofitable if they are not compensated for the complimentary food and lodging for the big gamblers. But how should such compensation across divisions be determined? Answering this question involves setting a transfer price the Hotel division receives and the Gaming division pays when one complimentary room is used for a junket guest. As an example of another interdependency, consider a customer staying at another hotel who comes to RRC to see a show. Suppose this guest drops $50 in RRC slot machines, a synergy exists between Entertainment and Gaming. In designing a transfer price scheme, how much of this $50 should be credited to the Entertainment division because their show got this customer in the door? Gaming would prefer Entertainment set low prices for its shows to insure a large crowd of potential gamblers. It is probably prohibitively expensive to design and implement a transfer pricing system that perfectly captures this $50 transaction. Or, consider those gamblers, not staying at RRC who prefer to gamble at RRC. They think they are lucky at RRC, or prefer the atmosphere. These people stay to see shows and have meals. For these customers, some amount of their show and restaurant receipts should be transferred to Gaming to compensate Gaming for getting them to RRC. But again, estimating the magnitude of these transfers can be costly. Simply ignoring them does not create incentives for the division heads to take into account the consequences of their actions on the other divisions’ performance. c. A number of mechanisms can be used to better capture synergies among divisions. These include: • use transfer prices, • award division managers shares in the firm, • tie divisional pay to firm-wide performance, • create groups and link pay to group-level performance, • link divisional pay to other divisions’ performance, • measure performance both objectively and subjectively, • use cost allocations to get divisional managers to cooperate, • reorganize. Each of these is briefly discussed below. d. Transfer pricing is a common method used to capture interdependencies among units. However, it has limitations as the following discussion illustrates. Suppose a room at RRC can be rented for $150 per night; it costs $25 to clean it and provide fresh linens. If Hotel does NOT have an empty room, the Hotel division foregoes $150 by providing a complimentary room to a Gaming junket guest. (The $25 cost of cleaning is incurred whether or not the guest is paying for the room.) By turning away a customer willing to pay for the room that is being provided complimentary to a junket guest, Gaming should pay Hotel the foregone room rental of $150. Had the room remained empty, the only cost the junket guest imposes on the Hotel division is the $25 cleaning cost. Therefore, the transfer price should be either $25 (had the room been empty) or $150 (if the room could have been rented).
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  • Fall '18
  • RRC

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