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Hi Cath,
Lets say for example the head office of a company sets transfer price at a market price for both the external market as well as the internal transfer. Division A transfer Goods to division B and both make a profit at the end of the day.Can this ensure goal congruence?
Will there not be any disagreement within the company?
If any, what might be the implications?Hi there, Good question – firstly to confirm that a head office can’t control the external price – that will be decided by the forces of supply & demand in the market place.
If the transfer is at market price then that is fine -particularly if both divisions are able to make a profit – and so the group overall is profitable too.
The issue only comes if the market price falls below the transfer price and so it becomes cheaper to buy in from external supplier at a lower price.
The buying division will not be willing to pay more than the external price so margins will have to be squeezed in the selling division. In some cases buying externally can best decision for the group -but depends on size of the cost saving from not having to produce internally.Thank you so so much for the explanation.
Could you please respond to my question under responsibility centreGod Bless you.
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