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Cherry Co has two independent divisions, A and B. Division A produces product X. B is a new division which produces product Y. It requires units of product X to produce product Y.
The following two statements have been made about Cherry Co.
(1) Cherry Co’s transfer pricing system should seek to establish a transfer price for X that will provide an incentive for the managers of A and B to make and sell quantities of products that will maximise sales
of Product Y.
(2) The manager of division B is likely to be more motivated if she is given freedom in which to operate and is able to purchase from outside suppliers if prices are cheaper.1. Could you explain how statement one is not correct?
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