Assume that Pat Borges, CEO of Crango, has mandated a transfer price equal to 200% of full cost. Now he decides to decentralize some management decisions and sends around a memo that states: “Effective immediately, each division of Crango is free to make its own decisions regarding the purchase of direct materials and the sale of finished products.”
1. Give an example of a goal-congruence problem that will arise if Crango continues to use a transfer price of 200% of full cost and Borges’s decentralization policy is adopted.
2. Borges feels that a dual transfer-pricing policy will improve goal-congruence. He suggests that transfers out of the Harvesting Division be made at 200% of full cost and transfers into the Processing Division be made at market price. Compute the operating income of each division under this dual transfer-pricing method when 181,440 kilograms of cranber ries are harvested during June 2013 and processed into juice.
3. Why is the sum of the division operating incomes computed in requirement 2 different from Crango’s operating income from harvesting and processing 181,440 kilograms of cranberries?
4. Suggest two problems that may arise if Crango implements the dual transfer prices described in requirement 2.