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
1. Using the general transfer pricing rule presented in the chapter, what is the minimum price at which the Transmission Division would sell its output to the Automobile Division? a. $1,013 b. $1,350 c. $1,613 d. $1,875 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?