Reference no: EM132792971

Woldem Inc. has two divisions A and B. The company manufactures mountain bikes. Division A manufactures the frame (intermediate product) and division B assembles the rest of the bicycle (final product) onto the frame. Both divisions are headed by autonomous managers who are evaluated based on their respective divisions' profits. Both divisional managers are free to buy/sell within or outside the firm and the market is competitive for both frame and the bike.

The following data is made available to you:

Selling price for the bike (final product) for Shiva, Inc.                                 $296
Long run average selling price for the bike frame (intermediate product)         $150
Variable cost per unit in division A to make a unit of frame                          $88
Variable cost per unit in division B to make a unit of bike (excluding the transfer price / purchase price for the frame) $170

Required:

Problem a) Assume that the company's transfer price policy is to transfer at the long-run average market price. Also assume that there division A can sell whatever it makes in the external market at the market price. Will this transfer price result in goal congruence? Support your answer with appropriate calculations.

Problem b) Assume that the company's transfer price policy is to transfer at the long-run average market price. Now assume that division A can meet all its external demand and still have surplus capacity. Will this transfer price result in goal congruence? Support your answer with appropriate calculations.

Problem c) Suggest a transfer price that may result in goal congruence more often than the current transfer price. Explain why?