Des Moines Industries consists of eight divisions that are evaluated as profit centers. All transfers between divisions are made at market price.
I-O-WoW, a division of Des Moines, sells approximately 20 percent of its output externally. The remaining 80 percent of I-O-WoW's output is transferred to other divisions within Des Moines. No other Des Moines Industries division transfers internally more than 10 percent of its output.
With respect to any profit-based measure of performance, I-O-WoW is the leading division within Des Moines Industries. Other divisional managers always find that their performance is compared to that of I-O-WoW. These managers argue that the transfer pricing situation gives I-O-WoW a competitive advantage.
a. What factors could contribute to any advantage that the I-O-WoW Division might have over the other divisions?
b. What alternative transfer price or performance measure might be more appropriate in this situation?