Performance Measures & Transfer Pricing: Pros Cons
Lucy opened an ice cream shop in Kissimmee. Their goal is to maximize profit
and to make the business appealing to customers. The cream shop was a big
success, so they decide to open an ice cream shop in many cities including
Orlando. They hire Luis to manage the shop in Orlando. Mario and Lucy are
considering different sets of performance measures for Luis. The first set would
grade Luis based on the cleanliness of the restaurant and customer service. The
second set would use accounting numbers including the profit of the shop in
Kissimmee.
Required:
a) Explain the advantages and disadvantages of each set of
performance measures.
b) How do they must design the organizational architecture
to control the agency problems?
2. When
goods are transferred from one profit or investment center to another, an
internal price is assigned to the units transferred. Although the general rule
for transfer prices is the outlay cost plus opportunity cost, may companies
instead use different methods to price their goods and services. What is the
transfer price that maximizes the firm value? What are the main reasons for
transfer price within firms? What are the advantages and disadvantages of the
most common transfer pricingmethods?
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