Assume that a company sets the transfer price for a product made by division A and sent to division B as full cost 10%. Further assume that division A is treated as a profit center. Discuss the incentives this situation creates for the manager of division A and why it is not in the company's best interest. (30 words maximum)

Answer and Explanation:

The manager of division A has the advantage of always selling at a profit since his department is positioned to always sell at profit to division B. However, selling at a transfer price to another department has the tendency to bring an incoherence of operations and decisions in the organization as a whole. If transfer price is high, it is possible that employees of department B may be demotivated as the high costs may negate operations and therefore look bad on their performance.

answer; whoever is willing and able to pay the price;