From the course: Accounting Foundations: Cost-Based Pricing Strategies

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Can transfer pricing solve this conflict?

Can transfer pricing solve this conflict?

From the course: Accounting Foundations: Cost-Based Pricing Strategies

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Can transfer pricing solve this conflict?

- The problem in this case is that the decentralized managers of Madeline and Harold, each acting in the best interest of her individual division, might not make a collective decision that is in the best interest of Sophie Systems as a whole. Now, can better accounting solve this problem? If so, how? If not, why not? Well, what is the underlying problem here? What's creating the conflict in motivations between the operating division managers of Madeline and Harold and the owners of Sophie Systems? In this particular case, the conflict is caused because the decisions are being made by the managers of Harold and Madeline, but the biggest profit benefit for the owners of Sophie Systems is the $150,000 profit that will be reported by Brandon Raw materials if Madeline gets the job and the profits are all kept internally. Remember that Madeline would buy the materials for $400,000 from yet a third Sophie Systems division,…

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