Problem 1. Mario and 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?
Problem 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 pricing methods?