Question

Fermi Motors, Inc., operates as a decentralized multidivision company. The Vevo division of Fermi Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manu-facturing the airbags is $ 200 per unit. The airbag division is currently working at 75% of capacity. The current market price of the airbags is $ 225 per unit.

Required
1. Using the general guideline presented in the chapter, what is the minimum price at which the airbag division would sell airbags to the Vevo division?
2. Suppose that Fermi 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. Instead of allowing negotiation, suppose that Fermi specifies a hybrid transfer price that “splits the difference” between the minimum and maximum prices from the divisions’ standpoint. What would be the resulting transfer price for airbags?



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  • CreatedJanuary 15, 2015
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