General Transfer Pricing Rule; Goal Congruence American Motors Inc. is divided, for performance evaluation purposes, into several divisions. The Automobile Division of American Motorspurchases most of its transmission systems from another unit of the company. The TransmissionDivision’s incremental cost for manufacturing a standard transmission is approximately $1,350 perunit. This division is currently working at 75% of capacity. The current market price for a standardtransmission is approximately $1,875.Required2. Suppose now that American Motors requires that whenever divisions with excess capacity sell their output internally to other divisions of the company, they must do so at the incremental cost of the supplying (producing) division. Evaluate this transfer pricing rule vis-à-vis each of the following objectives:autonomy, goal congruence, performance evaluation of the divisions, and motivation/incentive effects.3. If the two divisions of American Motors were to negotiate a transfer price, what is the likely range ofpossible prices? a. $1,013 to $1,350b. $1,350 to $1,613c. $1,350 to $1,875d. $1,013 to $1,8754. Evaluate the use of a negotiated transfer price using the same objectives listed in requirement 2.5. Which, in your opinion, is the preferable transfer pricing method—requirement 2 or 3? Why?
General Transfer Pricing Rule; Goal Congruence American Motors Inc. is divided, for performance evaluation purposes, into several divisions. The Automobile Division of American Motors
purchases most of its transmission systems from another unit of the company. The Transmission
Division’s incremental cost for manufacturing a standard transmission is approximately $1,350 per
unit. This division is currently working at 75% of capacity. The current market price for a standard
transmission is approximately $1,875.
Required
2. Suppose now that American Motors requires that whenever divisions with excess capacity sell their output internally to other divisions of the company, they must do so at the incremental cost of the supplying (producing) division. Evaluate this transfer pricing rule vis-à-vis each of the following objectives:
autonomy, goal congruence, performance evaluation of the divisions, and motivation/incentive effects.
3. If the two divisions of American Motors were to negotiate a transfer price, what is the likely range of
possible prices?
a. $1,013 to $1,350
b. $1,350 to $1,613
c. $1,350 to $1,875
d. $1,013 to $1,875
4. Evaluate the use of a negotiated transfer price using the same objectives listed in requirement 2.
5. Which, in your opinion, is the preferable transfer pricing method—requirement 2 or 3? Why?
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