(Transfer pricing and performance measurement) Sloan Industries consists of eight divisions that are evaluated as profit centers. All transfers between divisions are made at market price. Quality Bearing is a division of Sloan that sells approxi¬ mately 20 percent of its output externally. The remaining 80 percent of the output from Quality Bearing is transferred to other divisions within Sloan. No other division of Sloan Industries transfers internally more than 10 percent of its output.

Based on any profit-based measure of performance, Quality Bearing is the leading division within Sloan Industries. Other divisional managers within Sloan always find that their performance is compared to that of Quality Bearing. These managers argue that the transfer pricing situation gives Quality Bearing a com¬ petitive advantage.

a. What factors may contribute to any advantage that the Quality Bearing di¬ vision might have over the other divisions?

b. What alternative transfer price or performance measure might be more ap¬ propriate in this situation?