Computech Company operates as a decentralized multidivisional electronics compan

Question

Computech Company operates as a decentralized multidivisional electronics company Its
Computech Company operates as a decentralized multidivisional electronics company. Its laptop division buys most of its monitors from the screen division. The screen division’s incremental costs for manufacturing the monitors are $280 per unit. The screen division is currently working at 85% of capacity. The monitor’s current market price is $310 per unit. Instructions (a) Using the general approach to transfer pricing, determine the minimum transfer price for the screen division. (b) Computech Company’s transfer price rules state that whenever divisions with unused capacity sell products internally, they must transfer the products at incremental costs. Discuss how this transfer-price policy will affect goal congruence, division performance, and autonomy. (c) The screen and laptop divisions have negotiated transfer price between $280 and $310 per monitor. Discuss the impact of this transfer price on each division in terms of goal congruence, division performance, and division autonomy.

Explanation / Answer

(a).

Minimum transfer price should be $280 because as per information of the question it is clear that the screen division’s incremental costs for manufacturing the monitors are $280 per unit and both divisions laptop and screen are the part of same company that is why incremental cost should be charged from buying division. And we also know that screen division has unused capacity that is why demand of laptop division can be fulfill by using the unused capacity.

(b).

No doubt, this transfer-price policy will affect goal congruence, division performance, and autonomy because due to this transfer price policy, screen division will loose chance of profits of $30 per unit ($310 - $280) that is why this transfer policy will affect profitability of the screen division. Apart from this it will also affect autonomy of screen division because due to transfer price policy of the company, screen division will loose its’ control over price fixation of its’ own products that is why we can say that screen division autonomy will be badly affected. We also know that each division has goal of maximization of profits but due to implementation of transfer price policy of the company goal of the screen division will be affected.

(c).

As we know that transfer price set a limit for each divisions hence autonomy of each divisions will loose it’s autonomy. It may happen that sometime there are lower market price in the market then buying division will be suffered with losses thus profitability of laptop division will be affected. Let’s see oposite case when market price of the monitor is higher than transfer price then selling division (screen division) will suffer losses. Hence overall profitability of this division will be affected.

Thus overall we can say that company and each divisions of the company may suffer some losses, autonomy also will be affected, goal congruence also will be affected.

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