Resolute Manufacturing Holding Limited is the parent company of a number of separate subsidiary companies and each of these subsidiary companies come under the control of the Holding Company. Some of the subsidiary companies manufacture various types of components while other subsidiary companies manufacture finished products. In accordance with what she believes to be best practice, the Managing Director of the Group has decided that the transfer price which applies when components are sold by one subsidiary company to another subsidiary company for the purposes of manufacturing finished goods, should be set at marginal cost of the component (up to the point of transfer) plus the opportunity cost of making the transfer. However, the Managing Director has received complaints from the managers of the finishing companies that the managers of components subsidiaries have frequently refused to make any components available for transfer, even though spare production capacity exists in the components subsidiaries.

Required

Critically assess in detail, the range of options available to the Managing Director in order to increase the likelihood that the components subsidiary managers will behave in a goal congruent way in relation to making components available for transfer.

Answer rating: 100% (QA)

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