informative division profit measures in presenee of other information Transfer pricing allocates the gains from trade between

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informative division profit measures in presenee of other information Transfer pricing allocates the gains from trade between the trading divisions in the sense the accounting profit associated with the trade is alloeated to the divisions.

In this way the division ineome measures are made more informative, more descriptive of the managers' performance. Retum to the setting of Table 23.3.

Suppose the manager's evaluation (and therefore eompensation) ean depend on the divisions' profit measures and whether a transfer took place. Determine an optimal pay-for-pedormance arrangement for division A's manager. Give an intuitive explanation for your arrangement.

With unadjusted division profit (i.e., division profit based on T = 0) and transfers observed, there is no interest in transfer pricing in this setting. Carefully explain why this claim is eorrect.AppendixLO1

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