4. It is in the best interests of the company and of the divisions to come to
an agreement concerning the transfer price. As demonstrated in part (3)
above, any transfer price within the range $7.50 to $13.50 would im-
prove the profits of both divisions. What happens if the two managers
Case 12-34 (continued)
In this case, top management knows that there should be a transfer and
could step in and force a transfer at some price within the acceptable
range. However, such an action, if done on a frequent basis, would un-
dermine the autonomy of the managers and turn decentralization into a
sham.
Our advice to top management would be to ask the two managers to
meet to discuss the transfer pricing decision. Top management should
not dictate a course of action or what is to happen in the meeting, but
should carefully observe what happens in the meeting. If there is no
agreement, it is important to know why. There are at least three possi-
ble reasons. First, the managers may have better information than the
top managers and refuse to transfer for very good reasons. Second, the
managers may be uncooperative and unwilling to deal with each other
even if it results in lower profits for the company and for themselves.
Third, the managers may not be able to correctly analyze the situation
and may not understand what is actually in their own best interests. For
example, the manager of the Brake Division may believe that the fixed
overhead and administrative cost of $8 per brake unit really does have
to be covered in order to avoid a loss.
If the refusal to come to an agreement is the result of uncooperative at-
titudes or an inability to correctly analyze the situation, top management
can take some positive steps that are completely consistent with decen-
tralization. If the problem is uncooperative attitudes, there are many
training companies that would be happy to put on a short course in
team building for the company. If the problem is that the managers are
unable to correctly analyze the alternatives, they can be sent to execu-
tive training courses that emphasize economics and managerial account-
ing.
Case 12-35 (75 minutes)
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