Transfer price has been defined as an amount charged on a product or service when supplying division transfers the good or service to receiving division. In this situation, Electrical Division is the supplying division, while Brake Division is the receiving division. During the process of setting transfer price, W Industries should ensure the goal congruence between Electrical Division and Brake Division. In other words, both divisions should not strive to maximize their own divisions’ profits only during the process of setting transfer price for A2 electrical fitting. Both divisions’ goals should congruent with W Industries’s goal (Coolankitforever, 2009). In order to ensure the goal congruence between Electrical Division and Brake Division,
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Negotiated transfer price refers to the price agreed by both divisional managers after the negotiation stage. Negotiated transfer price can be stated as the alternative solution between cost-based price and market price (Agarwal, 2015). In this case, the manager of Electrical Division will negotiate with the manager of Brake Division first before they determine the transfer price for A2 electrical fitting. In order to adopt this approach, W Industries should ensure that the item is produced in imperfection market. For example, the market price of the item is not available and no homogeneous product as the item been offered by other competitors. Next, there are several guidelines for the manager of Electrical Division and the manager of Brake Division to aid them to negotiate the transfer price for the item. Before the negotiation process, both managers should ensure that they have equal bargaining power. Besides, they also need to know the needs of both divisions and they must ensure that the decision made are fair for both divisions. Moreover, they also need to understand the usage of cost and revenue information of the item, they need to ensure that those information are reliable and can be trusted. Before the negotiation starts, the conflicts happened between both managers should be eliminated in order to avoid the decision made is affected by their conflicts. The top management of W Industries should intervene the negotiation if it is necessary. In addition, W Industries should take into account the following factors after the negotiation stage has completed. For instance, the decision made might be influenced by the bargaining skills of the managers. Furthermore, the negotiation between both managers might lead to competition and divisiveness between both managers (Drury, 2012). Thus, if W Industries chooses to adopt the approach, the guidelines and factors above should be taken into
Negotiated transfer price refers to the price agreed by both divisional managers after the negotiation stage. Negotiated transfer price can be stated as the alternative solution between cost-based price and market price (Agarwal, 2015). In this case, the manager of Electrical Division will negotiate with the manager of Brake Division first before they determine the transfer price for A2 electrical fitting. In order to adopt this approach, W Industries should ensure that the item is produced in imperfection market. For example, the market price of the item is not available and no homogeneous product as the item been offered by other competitors. Next, there are several guidelines for the manager of Electrical Division and the manager of Brake Division to aid them to negotiate the transfer price for the item. Before the negotiation process, both managers should ensure that they have equal bargaining power. Besides, they also need to know the needs of both divisions and they must ensure that the decision made are fair for both divisions. Moreover, they also need to understand the usage of cost and revenue information of the item, they need to ensure that those information are reliable and can be trusted. Before the negotiation starts, the conflicts happened between both managers should be eliminated in order to avoid the decision made is affected by their conflicts. The top management of W Industries should intervene the negotiation if it is necessary. In addition, W Industries should take into account the following factors after the negotiation stage has completed. For instance, the decision made might be influenced by the bargaining skills of the managers. Furthermore, the negotiation between both managers might lead to competition and divisiveness between both managers (Drury, 2012). Thus, if W Industries chooses to adopt the approach, the guidelines and factors above should be taken into