Kit, Jazzy Corporation's CFO, has determined that the Motor

Division has purchased switches for its motors from an outside

supplier during the current year rather than buying them from the

Switch Division. The Switch Division is operating at full capacity and

demanded that the Motor division pay the price charged to outside

customers rather than the actual full manufacturing costs as it has

done in the past. The Motor Division refused to meet the price

demanded by the Switch Division. The Switch Division contracted

with an outside customer to sell its remaining switches and the

Motor division was forced to purchase the switches from an outside

supplier at an even higher price.

Kit is reviewing Jazzy Corporation's transfer pricing policy because

she believes that sub- optimization has occurred. While Kit believes

the Switch Division made the correct decision to maximize its

divisional profit by not transferring the switches at actual full

manufacturing cost, this decision was not necessarily in the best

interest of Jazzy Corporation.

Kit has requested that the corporate Accounting Department study

alternative transfer pricing methods that would promote overall goal

congruence, motivate divisional management performance, and

optimize overall company performance. The three transfer pricing

methods being considered are listed below. One of these methods

will be selected and will be applied uniformly across all divisions.

Standard full manufacturing costs plus markup.

Market selling price of the products being transferred.

Outlay (out-of-pocket) costs incurred to the point of transfer plus opportunity cost per unit.

REQUIRED:

1. Identify and explain two positive and two negative behavioral

implications that can arise from employing a negotiated transfer

price system for goods that are exchanged between divisions. (10

points)

2. Identify and explain two behavioral problems that can arise from

using actual full (absorption) manufacturing costs as a transfer price.

(5 points)

3. Identify and explain two behavioral problems most likely to arise if

Jazzy Corporation Corporation changes from its current transfer

pricing policy to a revised transfer pricing policy that it applies

uniformly to all divisions. (5 points)

4. Discuss the likely behavior of both "buying" and "selling" divisional

managers for each of the following transfer pricing methods being

considered by Jazzy Corporation Corporation.

a. Standard full manufacyuring costs plus mar (5 points)

b. Market selling price of the products being transferred (5 points)

C. Outlay (out-of-pocket) costs incurred to the point of transfer plus

opportunity cost per (5 points)