(Transfer pricing and management motivation) Yummy’s Food Stores operates 20 large supermarkets in the Midwest. Each store is evaluated as a profit cen¬ ter, and store managers have complete control over their purchases and inven¬ tory policy. Company policy is that transfers between stores will be made at cost if a store runs short of an item and another store has a sufficient supply.

During a recent period of rapid increases in food prices, company man¬ agers noticed that interstore transfers had decreased sharply. Store managers indicated that it was almost impossible to find another store with sufficient inventory to make a transfer when one store ran short of inventory. How¬ ever, more in-depth checking revealed that many of the other stores did ac¬ tually have the inventory items on hand.

a. Why would the store managers be reluctant to make the interstore transfers?

b. How could the transfer pricing policy be changed to avoid this type of situation?

 LO.1