From your reading of the case describe the issue(s) or problem(s) which should be the focus of your case analysis.

1. Lack of reasonable and logical financial result: Ignore fixed and variable cost, ignore case mix and thus transfer pricing of $7,906 might not be reliable and accurate which is shown in Exhibit 4.

2. High transfer price of 14% (($1,204-$1,059)/($1,059) x 100%) increases lead to goal incongruence (Exhibit 6): Under the full charge method of transfer pricing, the St. Luke Hospital would charge the HMO $1204 (Case Mix B), the same as for other third party payers. The hospital operation managers would benefit from $1,204,000 in increased revenues as beds are filled by the HMO patient, but the HMO manager would be foolish to accept St Luke Hospital rate when his/her performance appraisal is based on profit. Thus, the corporation (Mansfield Memorial Hospital and Lakeview Medical Centre) may stand to lose the improved occupancy and increase revenue to its hospital from its HMO due to the incongruence in objectives.

3. Bonus incentives: - Two way communication lacking between managers regarding the bonus system. - Budgeting linked to bonus system profiting (inaccurate results has affected transfer prices. - The Chief Financial Officer is reactive to the problems faced by the bonus system.

4. Internal Management: - Lack of accountability and responsibility over profit & expense centers - Lack of control measurement and adequate human resource management - Lack of consultation and cohesion between managers - Conflicts arising between Managers which could cause inner conflicts between managers

Identify and list relevant recommendations or actions derived from the analysis undertaken above.

1. Keep fixed and variable cost split: It provides better analysis in order to make an accurate decision making in cost reduction. For