Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns buys one of the main company's inputs of production from this company. He would be tempted to set the transfer price

Question

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The manager would be tempted to set the transfer price above market prices in order to increase the profits of his independent company and ultimately defraud the shareholders of the main company. This would result in the main company paying more for the input of production than they would if they had purchased it from a different supplier at market prices.

Suppose in Order to Defraud the Shareholders, a Manager Sets