1 Market Price as the transfer price

Division A
Revenue
Costs:
Variable Costs
Fixed Costs
Total operating Costs
Operating Income
Division B
Revenue
Costs:
Transferred-in Costs
Variable Costs
Fixed Costs
Total operating Costs
Operating income
Total Company
Revenue
Costs:
Transferred-in Costs
Variable Costs
Fixed Costs
Total operating Costs
Operating income

2 Transfer price 120% of full cost

15,000,000

11,700,000

8,550,000
1,200,000
9,750,000
5,250,000

8,550,000
1,200,000
9,750,000
1,950,000

30,000,000

30,000,000

15,000,000
6,000,000
2,250,000
23,250,000
6,750,000

11,700,000
6,000,000
2,250,000
19,950,000
10,050,000

45,000,000

41,700,000

15,000,000
14,550,000
3,450,000
33,000,000
12,000,000

11,700,000
14,550,000
3,450,000
29,700,000
12,000,000

3
Division A Manager
Bonus at market price:
Bonus at 120% of full cost:

105,000.00
39,000.00

Division B Manager
Bonus at market price:
Bonus at 120% of full cost:

135,000.00
201,000.00

4
The manager of Division A would be in favor of transfers at market prices. Using market prices will
ensure goal congruence. Along with this, she would argue that if the transfer price was 120% of full
cost, she wouldn't need to pay attention to her costs at all since she will always make 120% back. This
will lead to spending going out of control.