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Audit Unit 7

In: Business and Management

Submitted By nikky20
Words 1252
Pages 6
a 1. Positive * Both the buying and selling divisions have participated in the negotiations and are likely to believe they have agreed on the best deal possible * Negotiating and determining transfer prices will enhance the autonomy/ independence of both divisions b Negative * The result of a negotiated transfer price between divisions may not be optimal for the firm as a whole and therefore will not be goal congruent
The negotiating process may cause harsh feelings and conflicts between divisions

c 2. Not suitable for a decentralized structure when the autonomous divisions are measured on profitability, as the selling unit is unable to realize a profit
Can lead to decisions that are not goal congruent if the buying unit decides to buy outside at a price less than the full cost of the selling unit

d 3. A change in policy may be interpreted by the divisional managers as an attempt to decrease their freedom to make decisions and reduce their autonomy e If managers lose control of transfer prices and, thus, some control over profitability, they will be unwilling to accept the change to uniform prices
Selling divisions will be motivated to sell outside if the transfer price is lower than market, as this behavior is likely to increase profitability and bonuses

f Standard full manufacturing costs plus markup * The selling division will be motivated to control costs * The buying division may be pleased with this transfer price if the market price is higher g Market selling price of the products being transferred * This creates a fair and equal chance for the buying and selling divisions to make the most profit they can h Outlay (out-of-pocket) costs incurred to the point of transfer plus opportunity cost per unit
Both buyers and sellers should be willing to transfer

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