Transfer Pricing Problem. The tailor shop in a men's clothing store is set up as an autonomous unit. The transfer price for tailoring services is based on variable cost which is estimated at \(\$ 12\) per hour. The store manager feels that the Suit and Sport Coat Department is currently using too much tailor time and that this department could cut down on hours used by taking more care in fitting the garments.

The manager has decided to double the hourly tailor rate even though this new rate will be no reflection of the real variable cost. The idea is simply to provide an incentive to the Suit and Sport Coat Department to conserve on tailor time.
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1. What possible disadvantages do you see in the store manager's action? Do you agree or disagree with this means of stressing the need to conserve tailor time? Why?
2. Would it make any difference if the various selling departments were not required to use the tailor shop and were allowed to take their work to some outside tailor shop? Explain.