Question: Transfer pricing, goal congruence. The Croydon division of CC Industries supplies the Hauser division with 100,000 units per month of an infrared LED that Hauser uses in a remote control device it sells. The transfer price of the LED is $8, which is the market price. However, Croydon does not operate at or near capacity. The variable cost to Croydon of the LED is $4.80, while Hauser incurs variable costs (excluding the transfer price) of $12 for each remote control. Hauser's selling price is $32. Hauser's manager is considering a promotional campaign. The market research department of Hauser has developed the following estimates of additional monthly volume associated with additional monthly promotional expenses.
Additional Monthly Promotional Expenses: $80,000 $120,000 $160,000
Additional Monthly Colume (Units) 10,000 15,000 18,000
1. What level of additional promotional expenses would the Hauser division manager choose?
2. As the manager of the Croydon division, what level of additional promotional expenses would you like to see the Hauser division manager select?
3. As the president of CC Industries, what level of spending would you like the Hauser division manager to select?
4. What is the maximum transfer price that would induce the Hauser division to spend the optimal additional promotional expense from the standpoint of the firm as a whole?