Quest Motors Inc. operates as a decentralized multidivision company. The Tivo Division of Quest Motors purchases most of its airbags from the Airbags Division. The Airbag Division’s incremental cost for manufacturing the airbags is $90 per unit. The Airbag Division is currently working at 80% of capacity. The current market price of the airbags is $125 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 Tivo 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. Do you prefer the transfer-pricing policy in requirement 2 or requirement 3? Explain your answer briefly.