Great Taste Food Stores operates 20 large supermarkets in the East. Each store is evaluated as a profit center, and store managers have complete control over their purchases and inventory policy. Company policy is that transfers between stores will be made at cost if a store runs short of an item and another store has a sufficient supply.
During a recent period of rapid increases in food prices, company managers noticed that inter-store transfers had decreased sharply. Store managers indicated that it was almost impossible to find another store with sufficient inventory to make a transfer when one store ran short of inventory. However, more in-depth checking revealed that many of the other stores did actually have the inventory items on hand.
a. Why would the store managers be reluctant to make the inter-store transfers?
b. How could the transfer pricing policy be changed to avoid this type of situation?