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The Green division consists of a number of autonomous profit centers. some of these profit centers manufacture various types of components while other profit centers
The Green division consists of a number of autonomous profit centers. some of these profit centers manufacture various types of components while other profit centers manufacture finished consumer products (FCP). in accordance with what he believes to be best economic practice, the division manager Jim cox has decreed that the transfer price which applies when components are sold to a FCP, profit center should be the marginal cost of the component (up to the point of transfer) plus the opportunity cost of making the transfer. in recent months, however, Jim has received complaints from the managers of FCP profit centers that the managers of components profit centers have frequently refused to make any components available for transfer, even though spare production capacity exists in the components profit centers. Jim has said "I'm very surprised to hear of this non-cooperation, especially since the transfer pricing rule which i have decreed is the 'optimal' one according to the economics textbooks". REQUIRED: a. Evaluate the likely reasons for the behavior identified above, i.e., the refusal of the managers of profit centers to make any components available for transfer even where spare production capacity exists in the components profit centers. b. Explain in detail, the range of options available to Jim cox in order to increase the likelihood that the components profit centre managers will behave in a goal congruent way in relation to making components available for transfer
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