18.18 Goal congruence, negotiated transfer prices. (20 min) 1 From the standpoint of Escuelas as a whole, the Mining Division should transfer all 400,000 units of toldine to the Metals Division. Since the market is competitive, each division can buy and sell as much as it wants in the open market. Transferring in-house will avoid the variable transactions costs of buying (€3 per unit) and selling (€5 per unit) the toldine in the open market. 2 If it were to transfer inside, the Mining Division would like to achieve at least the same revenue it could get by selling outside. If it sold outside, the Mining Division would get €85 per unit (price of €90 per unit − €5 of variable selling costs. The transfer price would have to beat least €85. If the Metals Division bought toldine from the outside market, it would have to pay €93 per unit (price of €90 per unit + €3 of variable purchasing costs. It would be willing to buy from the Mining Division if the cost of toldine was less than €93. Transfer prices greater than €85 and less than €93 would result in both division managers agreeing to transfer toldine from the Mining to the Metals Divisions while acting autonomously. 3 Yes, allowing both divisions to buy and sell in the open market and to negotiate the transfer price between themselves will have the following benefits • Encourage the management of the Mining Division to be more conscious of cost control. • Provide a more realistic measure of divisional performance while motivating actions that are in the best interests of Escuelas as a whole. • Save transactions costs for the divisions and the company. • Perhaps provide toldine to the Metals Division at a cost lower than the price its competitors would pay for toldine. Of course, wherein the range between €85 and €93 per unit, the transfer price will eventually end up depends on the bargaining powers of the two divisions.
