Final answer:
The conflict between performance evaluation and cost-minimization objectives occurs due to differing goals; divisions seek higher transfer prices to maximize their profitability, while the firm seeks lower prices for overall cost minimization, leading to internal disputes.
Step-by-step explanation:
There is often a conflict between the performance evaluation and cost-minimization objectives of transfer pricing due to the differing goals of entities within a multi-divisional firm. Performance evaluation involves assessing divisional profitability, which can be maximized by setting higher transfer prices. On the other hand, cost minimization aims to reduce overall firm costs, which can be achieved with lower transfer prices. When divisions are measured on their profitability, they prefer to set higher transfer prices to appear more successful, but this can lead to suboptimal pricing from the perspective of the whole firm, which aims to minimize costs.
The conflict arises because setting a higher transfer price benefits the selling division but may harm the buying division by increasing its costs, leading to internal disputes. Managers, as a result, face the dilemma of setting transfer prices that meet both internal performance metrics and the firm's overall financial objectives.