Chapter 19 – Strategic Performance Measurement—Investment Centers
19-47 General Transfer-Pricing Rule; Goal Congruence (30-40 Minutes)
1. Using the general guideline presented in the chapter, the minimum price at which the Transmission
Division (i.e., the producer) would sell standard transmissions to the Auto Division (i.e., the buyer) is
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
3. If the two divisions were to negotiate a transfer price, the range of possible transfer prices will be
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Chapter 19 – Strategic Performance Measurement—Investment Centers
transmissions only if the transfer price equals or exceeds $1,350, its incremental cost of
manufacturing each standard
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-47 (Continued)
transmission. The Auto Division will be willing to buy units from the Transmission Division only if the
price does not exceed the external market price of $1,875 per unit. Within the price range of $1,350–
a. Achieves goal congruence? Yes, as described above.
b. Useful for evaluating division performance? Yes, because the transfer price is the result of direct
the producing division’s incremental costs).
4. Neither method is perfect, but negotiated transfer pricing (requirement 3) has more favorable
properties than the cost-based transfer pricing (requirement 2). Both transfer-pricing methods achieve
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-48 Transfer-Pricing Methods (50 minutes)
1. a. The positive and negative motivational implications arising from employing a negotiated transfer
price system for goods exchanged between divisions include the following:
Positive:
Negative:
The result of a negotiated transfer price between divisions may not be optimal for the firm as a
whole and therefore will not be goal congruent.
b. The motivational problems that can arise from using actual full (absorption) manufacturing cost as
a transfer price include the following.
Full-cost transfer pricing is not suitable for a decentralized structure where the autonomous
outside at a price less than the full cost of the selling unit. If the selling unit is not operating at
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full capacity, it should reduce the transfer price to the market price if this would allow the
recovery of variable costs plus a portion of the fixed costs. This price reduction would optimize
Chapter 19 – Strategic Performance Measurement—Investment Centers
19-48 (continued-1)
2. The motivational problems that could arise if Mylar Corporation decides to change its transfer pricing
policy to one that would apply uniformly to all divisions include the following:
A change in policy may be interpreted by the divisional managers as an attempt to decrease their
3. The likely behavior of both buying and selling divisional managers, for each of the following transfer
pricing methods being considered by Mylar Corporation, include the following:
a. Standard full manufacturing cost plus a markup.
The selling divisions will be motivated to control costs because any costs over standard cannot
b. Market selling price of the product being transferred.
Creates a fair and equal chance for the buying and selling divisions to make the most profit they
can and should promote cost control, motivate divisional management, and optimize overall
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-48 (continued-2)
c. Outlay (out-of-pocket) costs incurred to the point of transfer plus opportunity cost per unit.
This method is the same as market price when there is an established market price and the
seller is at full capacity. At any level below full capacity, the transfer price is the outlay cost only
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Chapter 19 – Strategic Performance Measurement—Investment Centers
19-49 Transfer Pricing; Decision Making (30-45 minutes)
1. Division B has capacity to produce 62,500 units (50,000 ÷ 0.80). Division A will require 25,000
units, which will limit B’s outside sales to 37,500 units, a loss in outside sales of 12,500 units
(50,000 − 37,500).
The contribution for each type of sale by Division B is:
To Division A Outside
Selling Price $ 75 $130
Less: Variable Costs per unit 60 70
Less: Variable Marketing Costs 0 8
Contribution Margin $ 15 $ 52
Determining the Best Decision (assuming Division A requires all 25,000 units):
The best decision in the interest of Division B is to not sell all 25,000 units to Division A:
Contribution for selling 25,000 units to Division A:
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The Division B manager should reject the proposal because it reduces Division B’s operating
income by $275,000.
Also, the decision of Division B to not sell inside is in the best interest of the firm as a whole. The
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