Goal-congruence problems with cost-plus transfer pricing methods, dual-pricing system (continuation of 23-32). Assume that Pat Borges, CEO of Crango, had mandated a 2. Harvesting Division operating income, $140,000 transfer price equal to 200% of full cost. Now he decides to decentralize some management decisions and sends around a memo that states: “Effective immediately, each division of

% Crango is free to make its own decisions regarding the purchase of direct materials and the sale of finished products.”

REQUIRED 1. Give an example of a goal-congruence problem that will arise if Crango continues to use a transfer price of 200% of full cost and Borges’ decentralization policy is adopted:

2. Borges feels that a dual transfer-pricing policy will improve goal congruence. He suggests that transfers out of the Harvesting Division be made at 200% of full cost and transfers into the Processing Division be made at market price. Compute the operating income of each division under this dual transfer pricing method when 400,000 kilograms of cranberries are harvested during June 2010 and processed into juice.

3. Why is the sum of the division operating incomes computed in requirement 2 different from Crangro’s operating income from harvesting and processing 400,000 kilograms of cranberries?

4. Suggest two problems that may arise if Crango implements the dual transfer prices described in requirement 2.

LO1