(Transfer prices) Schmidt Industries consists of eight divisions that are evalu¬ ated as profit centers. All transfers between divisions are made at market price. Precision Regulator is a division of Schmidt that sells approximately 20 percent of its output externally. The remaining 80 percent of Precision Regu¬ lator’s output is transferred to other divisions within Schmidt. No other Schmidt Industries division transfers internally more than 10 percent of its output.

Based on any profit-based measure of performance, Precision Regulator is the leading division within Schmidt Industries. Other divisional managers always find that their performance is compared to that of Precision Regula¬ tor. These managers argue that the transfer pricing situation gives Precision Regulator a competitive advantage.

a. What factors could contribute to any advantage that the Precision Regu¬ lator Division might have over the other divisions?

b. What alternative transfer price or performance measure might be more appropriate in this situation?

 LO.1