Sun Motors Inc. operates as a decentralized multidivisional car company. Its safety division buys most of its air-bags from the airbag division. The airbag division's incremental costs for manufacturing the airbags are $270 per unit. The airbag division is currently working at 75% of capacity. The current market price of the airbags is $300 per unit.
Instructions
(a) Using the general approach to transfer pricing, determine the minimum transfer price for the airbag division.
(b) Sun Motors Inc.'s transfer price rules state that whenever divisions with unused capacity sell products internally, they must transfer the products at incremental costs. Discuss how this transfer-price policy will affect goal congruence, division performance, and autonomy.
(c) The safety and airbag divisions have negotiated a transfer price between $270 and $300 per airbag. Discuss the impact of this transfer price on each division in terms of goal congruence, division performance, and division autonomy.