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"Cost and price information play no role in negotiated transfer prices." Do you agree? Explain.

Short Answer

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I disagree with the statement "Cost and price information play no role in negotiated transfer prices." Cost and price information are crucial in determining transfer prices that promote goal congruence, optimal decision-making, and accurate performance measurement among divisions. These factors are considered in market-based, cost-based, and negotiated transfer prices. Ignoring cost and price information could lead to poor decision-making and conflicts between divisions.
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Step 1: Define Transfer Prices

Transfer prices are the prices at which divisions within a company transact with each other, such as the sale of goods or services between departments. These internal transactions are necessary for the company to accurately allocate costs, create budgets and financial reports, and evaluate the performance of each division. #Step 2: Explain the Purpose of Transfer Prices#

Step 2: Explain the Purpose of Transfer Prices

The main purposes of transfer prices are to promote goal congruence among divisions, provide information for optimal decision-making, and facilitate the accurate measurement of divisional performance. In order to achieve these objectives, the transfer prices should be set in a way that incentivizes each division to make decisions that are in the best interest of the company as a whole, rather than focusing solely on their own division's profit. #Step 3: Discuss the Role of Cost and Price Information#

Step 3: Discuss the Role of Cost and Price Information

Cost and price information play a critical role in determining transfer prices that meet the objectives mentioned above. When negotiating transfer prices, both the selling division and the buying division should consider the costs involved in producing and selling the goods or services, as well as the price at which they can be sold to external customers. Some common approaches to setting transfer prices include using market-based transfer prices, cost-based transfer prices, and negotiated transfer prices. Market-based prices are determined by comparing the prices of similar goods or services offered in the open market. Cost-based prices are derived from the production cost of the goods or services, often with a markup. Negotiated transfer prices are typically a result of a compromise between the divisions, considering factors such as costs, external market conditions, and divisional goals. #Step 4: Conclusion#

Step 4: Conclusion

Based on the above discussion, we disagree with the statement "Cost and price information play no role in negotiated transfer prices." Cost and price information are essential in determining transfer prices that align with the company's overall goal and encourage collaboration between divisions. Failing to consider cost and price information when negotiating transfer prices could lead to suboptimal decision-making, inaccurate performance measurement, and conflicts between divisions.

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Most popular questions from this chapter

Chapter 22

\((\mathrm{CMA}, \text { adapted). }\) Quest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division's incremental cost for manufacturing the airbags is 90 dollarper unit. The airbag division is currently working at \(80 \%\) of capacity. The current market price of the airbags is 125 dollar per unit. 1\. Using the general guideline presented in the chapter, what is the minimum price at which the airbag division would sell airbags to the Vivo division? 2\. Suppose that Quest Motors requires that whenever divisions with unused capacity sell products internally, they must do so at the incremental cost. Evaluate this transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy. 3\. If the two divisions were to negotiate a transfer price, what is the range of possible transfer prices? Evaluate this negotiated transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy. 4\. Instead of allowing negotiation, suppose that Quest specifies a hybrid transfer price that "splits the difference" between the minimum and maximum prices from the divisions' standpoint. What would be the resulting transfer price for airbags?

Chapter 22

Ballantine Corp. produces and sells lead crystal glassware. The firm consists of two divisions, Commercial and Specialty. The Commercial division manufactures 300,000 glasses per year. It incurs variable manufacturing costs of 8 dollar per unit and annual fixed manufacturing costs of 900,000 dollar. The Commercial division sells 100,000 units externally at a price of 12 dollar each, mostly to department stores. It transfers the remaining 200,000 units internally to the Specialty division, which modifies the units, adds an etched design, and sells them directly to consumers online. Ballantine Corp. has adopted a market-based transfer-pricing policy. For each glass it receives from the Commercial division, the Specialty division pays the weighted-average external price the Commercial division charges its customers outside the company. The current transfer price is accordingly set at 12 dollar. Eileen McCarthy, the manager of the Commercial division, receives an offer from Home Décor, a chain of upscale home furnishings stores. Home Décor offers to buy 20,000 glasses at a price of 9 dollar each, knowing that the entire lead crystal industry (including Ballantine Corp.) has excess capacity at this time. The variable manufacturing cost to the Commercial division for the units Home Décor is requesting is 8 dollar, and there are no additional costs associated with this offer. Accepting Home Décor's offer would not affect the current price of 12 dollar charged to existing external customers. 1\. Calculate the Commercial division's current annual level of profit (without the new order). 2\. Compute the change in the Commercial division's profit if it accepts Home Décor's offer. Will Eileen McCarthy accept this offer if her aim is to maximize the Commercial division's profit? 3\. Would the top management of Ballantine Corp. want the Commercial division to accept the offer? Compute the change in firm-wide profit associated with Home Décor's offer.

Chapter 22

The Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of 65 dollar per screen. The SD can sell all its output to the outside market at a price of 100 dollar per screen, after incurring a variable marketing and distribution cost of 8 dollar per screen. If the \(A D\) purchases screens from outside suppliers at a price of 100 dollar per screen, it will incur a variable purchasing cost of 7 dollar per screen. Slate's division managers can act autonomously to maximize their own division's operating income. 1\. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? 2\. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? 3\. Now suppose that the SD can sell only \(70 \%\) of its output capacity of 20,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than \(20,000 \mathrm{TV}\) sets per month. a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? b. From the point of view of Slate's management, how much of the SD output should be transferred to the AD? c. If Slate mandates the SD and AD managers to "split the difference" on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement \(3 b ?\)

Chapter 22

What is one potential limitation of full-cost-based transfer prices?

Chapter 22

(J. Patell, adapted) Sierra Inc. consists of a semiconductor division and a process-control division, each of which operates as an independent profit center. The semiconductor division employs craftsmen who produce two different electronic components: the new highperformance Xcel-chip and an older product called the Dcel-chip. These products have the following cost characteristics: Due to the high skill level necessary for the craftsmen, the semiconductor division's capacity is set at 55,000 hours per year. Maximum demand for the Xcel-chip is 13,750 units annually, at a price of 130 dollar per chip. There is unlimited demand for the Dcel-chip at 65 dollar per chip. The process-control division produces only one product, a process-control unit, with the following cost structure: \(\bullet\)Direct materials (circuit board): 80 dollar \(\bullet\)Direct manufacturing labor (3.5 \(\text { hours }\) times 10 dollar): 35 dollar The current market price for the control unit is 125 dollar per unit. A joint research project has just revealed that a single \(X\) cel-chip could be substituted for the circuit board currently used to make the process-control unit. The direct manufacturing labor cost of the processcontrol unit would be unchanged. The improved process-control unit could be sold for 185 dollar. 1\. Calculate the contribution margin per direct-labor hour of selling Xcel- chip and Dcel-chip. If no transfers of Xcel-chip are made to the process- control division, how many Xcel-chips and Dcel-chips should the semiconductor division manufacture and sell? What would be the division's annual contribution margin? Show your computations. 2\. The process-control division expects to sell 1,250 process-control units this year. From the viewpoint of Sierra Inc. as a whole, should $1,250 \mathrm{Xcel}$ -chips be transferred to the process-control division to replace circuit boards? Show your computations. 3\. What transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations. 4\. If labor capacity in the semiconductor division were 60,000 hours instead of 55,000 , would your answer to requirement 3 differ? Show your calculations.

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