Reference no: EM133161456

Question - Two of the divisions of Greenline Industrial Equipment Company are the Engine Division and the Payloader Division. The Engine Division produces motors used by both the Payloader Division and a variety of external industrial customers. For external sales, sales orders are generally produced in 50- unit lots. Using this typical lot size, cost per motor is as follows:

Variable production costs $1,050

Fixed manufacturing overhead 450

Variable selling expenses 150

Fixed selling expense 210

Fixed general and administrative expense 320

Total unit cost $2,180

Engine Division normally earns a profit margin of 20% by setting the external selling price at $2,616. Because a significant number of sales are being made internally, Engine Division managers have decided that $2,616 is the appropriate price to use for all transfers to the Payloader Division. When the managers in Payloader Division heard of this change in the transfer price, they became very upset since the change would have a major negative impact on Payloader's net income figures. Because of competition, Payloader has asked Engine Division to lower its transfer price. Payloader managers have approached the Greenline's president, who has noted that bid price from an external supplier is $2,320 per motor and the market is such that the Engine division can sell all its production externally earning a profit margin of 20% on total cost.

Required -

a. What is the appropriate transfer price and why? How does it satisfy the criterion of goal congruence?

b. Assume that the transfer price is set at $2,320 per motor. State the criteria of a good transfer pricing policy and discuss which ones will be satisfied by this transfer price and why?