Group Members Kiran Mishra Karishma Nair Nimmi Chauhan Meenakshi Sharma Sandhya Shrivastava 30 25 08 46 50

The term transfer pricing is the internal priced charged by a selling department division or subsidiary of a company for a raw material, component or finished good or service which is supplied to a buying department division or a subsidiary of the same company.

To provide each business unit with the relevant information it needs to determine the optimum trade-offs between the company cost and revenues To induce goal congruent decisions that a system should be designed to improve business profit & company profit To measure economic performance of the individual business units System should be simple to understand and easy to administer

Market Based Pricing

The ideal transfer price is based on a well established normal market price for the identical product being transferred i.e. a market price reflecting the same condition (Quantity, Delivery time, Quality ) as the product to which the transfer price applies

Cost Based Price

If competitive price is not available transfer prices may be set on the basis of cost plus profit although such prices are complex to calculate and results are less satisfactory then market based cost

Overview

integrated manufacturer of all types of home appliances

decentralized ,divisional organization

four product divisions, four divisions, and six staff offices manufacturing

each division and staff office headed by a vice

The divisions were expected to deal with one another as though they were independent companies. Parts were to be transferred at prices arrived at by negotiation between the divisions based on the actual prices paid to outside suppliers for the same or comparable parts. If the divisions could not agree on a price, they could submit the dispute to the finance staff for arbitration

Product division did not have power to decide whether to buy from within the company or from outside Purchasing staff had the authority to settle disputes between the product and manufacturing divisions In nearly every case of dispute the purchasing staff had decided that part would continue to be manufactured within the company

Chrome Product Division sold to Electric Stove Division Corrosion and Stain resistant unit fitted on top of stove

Initially outsourced, later manufactured by CPD

Rise in customer complaints Problem rectified Appearance quality improved

Present Price

$ 10

Cost of added operation

Profit mark up New Price

.80 cents
.10 cents $ 10.90

Added operations at 80 cents per unit Improved Quality

Present Price based on quality standards

Adheres to GAC requirements

Acceptable appearance is subjective Quality improvement not requested Customer impact doubtful 90 cents not justified Consultation with all the parties Division not notified before improvement

Engineering department stated proposed cost of 90 cents was reasonable Quality superior to outside vendors Quality improvement requested by GAC

Electric Motor Division sold to Laundry Equipment Division and Refrigeration Division At request of EMD, RD purchased 25% in 1985 and now procures 100% Increase supply & reduced demand leading to fall in price level EMD priced $ 2.40 and Outside vendor $2.15, EMD refused to reduce its price

$ 2.15 was a distress price and not valid for determining internal price At $ 2.15 difficult to realize profit If forced EMD will shut down its plant & let outside vendor supply

RD purchased the unit for $ 2.15 from outside vendor Outside vendor has the capacity to satisfy full requirement RD should be allowed to request quotations from outside due to pricing disparity

Purchasing staff reviewed outside market situation and concluded that prices reduced as a result of excess capacity RD could purchase requirement from next two years at $2.15/ unit

Laundry Equipment Division purchased from gear & Transmission Division & Thorndike Machining Corp (Outside Vendor) Non renewal of agreement with the outside vendor So TMC proposed reduction in price from $12 to $ 10 GTD agreed to produce the product at same price with modified features

LED stated they could procure from outside at $11.21 GTD agreed to the same price earlier Intra company pricing policy stated buying and selling at competitive prices Did not protest price proposal because to early for negotiation

The $ 10 quote by TMC was invalid as it was a desperate effort for business sustenance Project was approved at $ 12/ unit LED didnt comment on the proposal on time, hence they could not object later on

Concluded that quote of LED of $11.25 was appropriate Quote by GTD of $11.66 faulty, as it did not allowed for design elimination which would reduce costs per unit by 50 cents GTD $12 quote satisfies its profit objective Purchase staff stated that for the near future transmission units may be obtain from TMC

Authority for Division to take Sourcing Decision Need to have a formal channel of communication Depth of scrutiny of projects by top management and concerned division before project approval Increase In-House production capacity as per requirements

Need proper measuring tools and experts for better decisions