Alpha Division – 12/07

The question has three different ‘profits’ that could be used to evaluate the manager or the division.

So, 1 Variable short run margin would contain items (i) and (ii). Is that an acceptable measure of managerial performance when the transfer price is fixed? The answer concludes that it’s OK because the transfer price is determined by market price so that would seem fair.

2 Controllable profit would contain (i) (ii) (iii) as management has some control over all of these. It is not clear whether (iv) should be charged at this point or not as that depends on whether current management was responsible for buying those assets being depreciated.

3 Divisional profit, perhaps (iv) should be charged only at this level. As for (v) whether it is fair to charge this to the division depends on the use the division makes of those services and that is not necessarily within the control of the divisional manager. If they were incurred and then recharged using some arbitrary formula the division could be unfairly penalised by these so that divisional profit was unreasonably low.