The transfer pricing system operated by a divisional company has the potential to make a significant contribution towards the achievement of corporate financial objectives.
Required
Explain the potential benefits of operating a transfer pricing system within a divisionalised company.
Potential benefits of operating a transfer pricing system within a divisionalised company include the following.
(a) It can lead to goal congruence by motivating divisional managers to make decisions, which improve divisional profit and improve profit of the organisation as a whole.
(b) It can prevent dysfunctional decision-making so that decisions taken by a divisional manager are in the best interests of their own part of the business, other divisions and the organisation as a whole.
(c) Transfer prices can be set at a level that enables divisional performance to be measured 'commercially'. A transfer pricing system should therefore report a level of divisional profit that is a reasonable measure of the managerial performance of the division.
(d) It should ensure that divisional autonomy is not undermined. A well-run transfer pricing system helps to ensure that a balance is kept between divisional autonomy to provide incentives and motivation, and centralised authority to ensure that the divisions are all working towards the same target; the benefit of the organisation as a whole.
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What objectives might the following not for profit organisations have?
(a) An army (d) A political party
(b) A local council (e) A college
(c) A charity
One of the objectives of a local government body could be 'to provide adequate street lighting throughout the area'.
(a) How could the 'adequacy' of street lighting be measured?
(b) Assume that other objectives are to improve road safety in the area and to reduce crime. How much does 'adequate' street lighting contribute to each of these aims?
(c) What is an excessive amount of money to pay for adequately lit streets, improved road safety and reduced crime? How much is too little?
What general objectives of non profit seeking organisations are being described in each of the following?
(a) Maximising what is offered
(b) Satisfying the wants of staff and volunteers
(c) Equivalent to profit maximisation
(d) Matching capacity available
A division with capital employed of $400,000 currently earns an ROI of 22%. It can make an additional investment of $50,000 for a five year life with nil residual value. The average net profit from this investment would be $12,000 after depreciation. The division's cost of capital is 14%.
What are the residual incomes before and after the investment?
The transfer pricing system operated by a divisional company has the potential to make a significant contribution towards the achievement of corporate financial objectives.
Required
Explain the potential benefits of operating a transfer pricing system within a divisionalised company.
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