12/05/2014

1
Pricing and Transfer Pricing
External Pricing Decisions
Factors; economic trend; market structures:
source: http://www.slideshare.net/ujjmishra1/perfect-competition-28840601
Price maker
or sellers
Price taker
Possible collusion
Some control
Price maker
External Pricing Decisions
source: https://www.google.ca/search?q=pricing+strategy&newwindow=1&client=firefox-a&hs=NL1&rls=org.mozilla:en-
US:official&tbm=isch&imgil=2B_Zj6PIq58IxM%253A%253Bhttps%253A%252F%252Fencrypted-
tbn1.gstatic.com%252Fimages%253Fq%253Dtbn%253AANd9GcROQvkmX0mznGac_7ZzJDNdhECMMhevCq1L5KoB0_LVQiprQq4n%253B310%253B248%253BDj9WBi8Zior8qM%253Bhttp%25253A%25252F%25252Fwww.ma
rketingmo.com%25252Fstrategic-planning%25252Fhow-to-develop-a-pricing-strategy%25252F&source=iu&usg=__P7UnSKpWUh-
Pm778u4ikpk57Fjw%3D&sa=X&ei=aALsUozIC4aQ3AXM0oGYAQ&ved=0CFMQ9QEwAQ&biw=924&bih=460#facrc=_&imgdii=2B_Zj6PIq58IxM%3A%3B2a5vWTpQUJLdNM%3B2B_Zj6PIq58IxM%3A&imgrc=2B_Zj6P
Iq58IxM%253A%3BDj9WBi8Zior8qM%3Bhttp%253A%252F%252Fwww.marketingmo.com%252Fcommon%252Ffiles%252Fpricing.jpg%3Bhttp%253A%252F%252Fwww.marketingmo.com%252Fstrategic-
planning%252Fhow-to-develop-a-pricing-strategy%252F%3B310%3B248
Factors: market demand; customer demographics & social
class; perceived value of your product/service:
Set high price at
first, then lowers the
price over time with
increased demand.
Set low price at first
to be increased.
Low price
High price
External Pricing Decisions
source: http://www.businessweek.com/stories/2005-05-25/insource-offshore-outsource-help
Factors: Costs
Insource: reducing costs by establishing shared service
centers within an organization or stopping contracting a
business function.
Outsource: reducing costs by allowing a third party to take on
a function in an organization.
Offshore: reducing costs by moving business processes to a
foreign location.
Relevant costing or incremental analysis helps with such
decisions.
External Pricing Decisions
source: http://www.businessweek.com/stories/2005-05-25/insource-offshore-outsource-help
Pricing approaches:
Cost-based: full cost pricing = costs + profit markup
Demand-based: based on customer demand including
skimming, penetration, value-based pricing and etc.
Value-based: value-based pricing = client perceived value
(sold based on emotions (fashion), in niche markets, in
shortages (e.g. drinks at open air festival at a hot summer
day) or for indispensable).
Target-based: price is made and then costs are adjusted so
that that price can be achieved.
Reverse engineering: disassembling an existing product to
discover how to produce and price something similar.
Life cycle based pricing
Penetration
or
Skimming
for
innovative
products
Penetration
if new
entrant
Match or
best
competitors
Cut
price
source: http://www.slideshare.net/syed_shahzad786/product-life-cycle-and-pricing
12/05/2014
2
External Pricing Decisions
source: http://en.wikipedia.org/wiki/Cost-plus_contract
Contracts:
In a cost-plus contract, a contractor is paid for all of
allowed expenses to a set limit plus additional payment to
allow for a profit.
In a fixed-price contract, a contractor is paid a negotiated
amount regardless of incurred expenses.
Responsibility Centers - Segments
Salty Snacks
Product Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
Beverages
Product Manager
Confections
Product Manager
Operations
Vice President
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Superior Foods Corporation
Corporate Headquarters
President and CEO
Cost
Centres
Investment
Centres
Profit
Centers
A segment is any part
or activity of an
organization about
which a manager
seeks cost, revenue,
or profit data.
Internal Pricing
Transfer Pricing
An intermediate product is a product transferred from one
subunit to another of the same organization.
A transfer price is the price one subunit charges for a product or
service supplied to another subunit of the same organization.
Market-based transfer price is the price a subunit charges to
outside customers.
Cost-based transfer price is the costs of producing the product
(e.g. variable product costs; absorption product costs; or full
product costs (that include all product costs and costs of other
business functions like R&D, marketing, distribution and customer
service).
Negotiated transfer price is the price determined by bargains
between subunits.
source: Cost accounting by Horngren etc. with ISBN 0-13-035580-1
A negotiated transfer price results from discussions
between the selling and buying divisions.
Upper limit is
determined by
the buying
division.
Lower limit is
determined by
the selling
division.
Range of Acceptable
Transfer Prices
NEGOTIATED TRANSFER PRICES
Capacity of
Selling Division
Minimum Transfer Price
Set by Selling Division
Maximum Transfer Price
Set by Buying Division
Idle Capacity Variable Cost Price paid to outsider
No Idle Capacity Variable Cost +
Lost CM
Price paid to outsider
Normal Capacity is
the volume of
production that is
normally possible
for a time period.
Idle capacity exists
when the
production is at a
level lower than the
normal capacity.
For negotiated transfer pricing:
Fairness is one of the most
important criteria in the design of
transfer pricing system.
Internal sourcing should be
supported by compensation on
firm profit;
External sourcing should be
supported by compensation on
division profit.
Negotiated Transfer Pricing
Multinational Transfer Pricing
Exchange rates
Tax rates: income tax; payroll tax
Duties, tariffs
Political climate
Repatriation of profits: increasing prices of things transferred
into divisions in countries that tax payment of income or
dividends to parties outside their national borders can increase
funds paid out of these countries without appearing to violate
income or dividend restrictions.
source: Cost accounting by Horngren etc. with ISBN 0-13-035580-1
Capacity requirements planning
Capacity planning is the process of determining
the production capacity needed by an
organization to meet changing demands.
Example:
Source 2:
https://www.google.ca/search?q=capacity+requir
ements+planning&newwindow=1&client=firefox-
a&hs=BVT&rls=org.mozilla:en-
US:official&tbm=isch&imgil=9PtbNYc-
Aa8oXM%253A%253Bhttps%253A%252F%252Fencrypt
ed-
tbn3.gstatic.com%252Fimages%253Fq%253Dtbn%253
AANd9GcQSxlaBVmW5iPN4HUZFN8dNUMUQ0QO5wmr
4A8lWwEq0pWJM-
zNa%253B1922%253B2698%253BnHXRoCONmcX2nM
%253Bhttp%25253A%25252F%25252Fwww.asprova.jp
%25252Fmrp%25252Fglossary%25252Fen%25252Fcat
252%25252Fpost-
857.html&source=iu&usg=__ffLY3f81Kzf1rugg5IZEL
Hdbv_8%3D&sa=X&ei=0hXwUvbTO6So2gW1zoG4DA
&ved=0CEEQ9QEwBA&biw=924&bih=460#facrc=_
&imgdii=_&imgrc=IRESGTy4pN-
qbM%253A%3BNMldxMjkNiyWxM%3Bhttp%253A%25
2F%252Fwww.edaratgroup.com%252Fusermedia%252
Fcapacity%252520planning.jpg%3Bhttp%253A%252F
%252Fwww.edaratgroup.com%252Fen%252Fcapacity-
planning%3B792%3B768
Source 1: http://en.wikipedia.org/wiki/Capacity_planning