Transfer Pricing | Sales | Prices

Organizational chart Of GAC

Board of Directors


Finance staff

Engineering staff

Manufacturing staff

Industrial Relations staff

Purchasing staff

Marketing staff

Group vice president Manufacturing divisions Chrome Product division
Gear And Transmission division

Group vice president Product divisions Electric Stove division Refrigerating division Laundry Equipment division Miscellaneous Appliance division

Electric Motor division Stamping division

 manufactured very few component. Assembled.Product Division/Manufacturing Divison ‡ Product Division :  Designed. and Sold various home appliances. ‡ Manufacturing Division  manufactured approximately 75 % of their sale to the product division  Product designed by the product division  Engineering department did only 20 % of the total company engineering. .

Negotiation Price based on actual price paid to the outside supplier Lack of Goal congruence/ Arbitration .Divisions: Expected to deal with one another Transfer Price at General Appliances.

9. Assigned Job to vice President  New operation were added along with increase in price (90 cent) to chrome plate: Copper Plating And Buffing. Total cost after adding operation is 10. .Problem Situation Manufacturing Division Chrome Product division Started at January 1986 Chrome Plated Sold Electric Stove division President Concerned over complaint from customer and dealers about the quality of company product. prior to that it was $10.

 Proposed cost were reasonable . Finance Department : Asked Engineering Department & Quality department of manufacturing staff to review the added operation. Quality improved If outside supplier added the operation. represent efficient Processing & new part were of superior quality. he would also charge the same price. . then it can be easily marketable Price was not worth. Product Division (Electric Stove) No Change in Engineering Specification (Appearance is Subjective) Not requested nor approved If features were added.Arbitration(views of Both division) Manufacturing Division (Chrome) Required by manufacturing Staff to add operation.

9 is worth price then they must not sell to Electric Stove Division as they are not ready to buy at that price. as they are independent profit centre.Decision taken ‡ If chrome product division think that they had added Operation and $ 10. They must find the outside customer. .

But there was a contract between the above divisions to buy units @ $ 2. decided to purchase from E. Purchase from Monson Control Corp. price of M.C. From 1988. ‡ Negotiation between Refrigerator and Electric Motor Division.000 units/ annum Refrigerating division Prior to 1985. In 1987.000 units/ annum Laundry Equipment division 20. ‡ ‡ ‡ ‡ ‡ .D. M.Thermostatic control unit.M. Problem 2 Electric Motor division for Refrigerator Division.40.C was @ $2.C has reduced its price to $2.C.

At $2. Product Division (Refrigerator Divsion) Reliable outside supplier (M.Arbitration (Views) Manufacturing Division (E.C.000 units.C) Price was distressed & not valid by M.15 they could never be in profit position. Deal was done to the favor and benefits of company as a whole.40.M. Annual order was 1 Lac units as compare to 20. The Contract also says : In case of major price disparity sourced to the lowest bidder. .C (Anti-dumping ) It was going to take all his ability and ingenuity to make a profit @ $2.C.D) Product Division (Laundry Equipment Division) Rules : Intra company price should be transferred at competitive prices.

Decision taken ‡ We will advice laundry division to ask M.000 units.C.C. .C is ready to supply only 20.15.C. as M. to provide 1 Lac units @ $2.

(Outside Supplier) Gear And Transmission division Laundry Equipment division ‡ Laundry Equipment Division had Agreement from 1977 to 1987 to buy one half of transmission from TMC. ‡ In 1985. .Problem 3 Thorndike Machining Corp. ‡ Reconsider the decision : Low cost Transmission ‡ Laundry Equipment want to buy from TMC and GT division want to expand the production. GAC decided not to extend agreement.

Division Proposed Selling Price of Thorndike model Probable Cost to GT (assuming 11% profit) Add: Cost of added design feature Increase cost of material and Labor Total Cost Objective Profit Selling Price .10.60 . Proposed Price by G.60 1..40 12 .$ 10 . 9 0.75 .85 0. 1.Contd.. ‡ Engineering department determine new feature for the transmission and gives proposed price to the LE division.T.

Finance Department: ‡ No commitments can be made too early by TMC. be competitive prices.25 it would be 6%. ‡ At $ 12 PAT of G&T would be 15% and at $ 11.Arbitration (Views) Manufacturing Division (G&T) $10 Quotation from TMC was invalid. In 1985. . If TMC receive this order it would raise its Rule: Intra Company transfer price would price. Laundry Equipment did not object the price after the facility were already in place. And its important that price developed by G&T division was in error because it failed to allow design elimination.21 as proposed before proposing this project to management. it was too early to commit to a negotiable price. Product Division (LE) G&T already agreed to the price @ $ 11.

.Decision Taken ‡ Buy units from TMC till they provide units @ $ 10.

if H. Negotiation is frequently advocated as a transfer-pricing mechanism in decentralized organizations to foster greater divisional autonomy and to improve firm profit performance. The only thing we suggest that if there is a tie in price the order must be go to the company s division. Establishing selling price and arriving at satisfactory purchase price are among the primary function of line management.Q control price divisional manager. Reason: Negotiation made by is a result of compromise made by both buyer and the seller. If they cannot negotiate better they simply buy from or sell to outsider s. Given external market opportunities and private information with respect to divisional cost and revenue functions. one division could conceivably make itself better off at the expense of another or the firm as a whole. ability to generate profits reduces.We will go with the same policy the company is adopting right now. .

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