Also, account must be taken into of the fact that Thompson will not be able to get a better price from other outside sources as most will follow the market price too.
The underlying problem of the transfer price system could be that each division is judged based on profits and return on investment. This causes the division to over-emphasize on profits and encourages goal incongruence. Each division aims at achieving short-term profits so as to look better in the company's eyes. In their bid to achieve a high profit figure, they fail to optimize the company's profit as a whole. This will affect the company long-term profits.
Hence, the company should not just assess each division based solely on financial figures like profit and return on investment. The company should assess them based on other non-financial things like quality so as to divert the division's emphasis on profits. In addition, the company should allow the divisions concerned to negotiate between themselves as they are the ones closest to the situation, rather than just asking the divisions to meet the market price.
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