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This question is regarding Transfer Pricing:
Is it correct that to obtain “Goal Congruence” managers should have the same goal to optimize the profits for a company as a whole rather than their own divisional profits and they should continue making a product if it is profitable for a company overall even though one division is profitable and other is not?
Managers have to deal with the loss-making products because it is in the company’s interest overall but isn’t it conflicting with the divisionalization concept where managers have full autonomy to make decisions on their own?
So how should we achieve goal congruence in this situation?
The whole purpose of ‘sensible’ transfer pricing is so that if the product is profitable for the company as a whole, then both managers should be motivated to deal in the product. The transfer price should therefore be in a range that will result in each division showing a profit.
That is goal congruence – that the transfer price motivates both divisions to do what is also best for the company as a whole.
It seems that you cannot have watched my free lectures on transfer pricing because I explain this point in detail, with lots of examples.
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