Of this 30, 25 are out of pocket costs. Own Supplies Total As shown in the calculations above, Northern should accept the bid from Thompson division as it has the lowest cost if all transfer prices within the company were calculated at costs. Deciding based on transfer price will not induce goal congruence as the situation is not ideal.
This causes the division to over-emphasize on profits and encourages goal incongruence.
This shows that their price is not competitive enough. Does this problem call for some change, or changes, in the transfer pricing policy of the overall firm? The vice president of Birch should take action, but not against just this division.
I think he needs to take action in order to remedy the overall problems associated with this transfer pricing policy.
So the goal of the division is to have their divisional profit as high as possible. If the Nothern Division accept another bid than that of the Wester Paper company their divisional profit will be smaller.
When each division can set their own price, conflicts and disagreements can occur on a frequent basis and each division could make decisions that only benefit their own division rather than the company as a whole.
If needed top management is able to order the acceptance of another bid.