Question

13. For the following questions (13.18) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product itsells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price. A transfer pricing system should: a. maximize the transfer price c. maintain common and harmonious goals between the divisions and the entire firm d. none of the above b. minimize the transfer price

Answer 1

Option C maintain common and harmonious goals between the divisions and the entire firm Explanantion: The transfer price creates revenue for the selling division and purchase cost for the buying division within the organisation, affecting each divisions operating income. The product transferred between divisions of an organization is called an intermediate product/component. It can either be processed further by receiving division or, if transferred from production to marketing, resold to an external customer. Aims of a transfer pricing system 1) To encourage goal congruence, whereby individual managers' own goals are the same as the goals of the company as a whole. 2) To enable the realistic measurement of divisional profit. 3) To sustain high level of management efforts. 4) To give autonomy to managers. 5) To ensure profit maximization for the company as a whole. It may be difficult to reconcile all of these