1. OEM Division does not know the accurate transfer price to AM, because Tru-fit has never sold that parts in outside OEM market. 2. Unable to adjust transfer price to inflation.
** Therefore, no accurate transfer price of products from OEM and AM.**
Problem: Unclear transfer price policy.
1. Market-base price: In this case, OEM never sold parts to outside OEM market thus, OEM can not know the accurate transfer price because there is no current external market. However, OEM can do the research to figure out the market price but it could be costly and takes time. 2. Cost-plus price: Where there is no external market price. 2 ways to compute cost-plus price;
Standard variable cost + markup (represent contribution margin) Standard absorption cost could be lead to overpricing.
The appropriate method is to use standard variable cost because it is intended to use for internal managerial decision make while absorption cost intends for external distribution. 3. Negotiated price: OEM can start from using a market price, however, in this case there is no current market price. Conclusion: Tru-fit should use a cost-plus price to set up the transfer price policy in order where there is no market price exist. However, Tru fit needs to consider about the external market and spare capacity. In this case, there is no current external market for the part that OEM never sold externally and there is an excessive inventories level thus, OEM does not need to compute the opportunity cost to give up on selling products to AM.
Transfer price = Outlays cost + opportunity cost.
Issue: Top manager does not want to consolidate AM and OEM report in a single organization.
Problem: Management problem
Advantages of consolidate:
1. Shared information: There will be more communication between decentralization as the report needs to consolidated thus, the information will be shared among division thus, it could...