Transfer Pricing for Aligning Divisional and Corporate Decisions Case Solution & Answer

This Case is about MANUFACTURING, ORGANIZATIONAL STRUCTURE, PRICING

PUBLICATION DATE: September 15, 2008 PRODUCT #: BH293-HCB-ENG

Talks about transfer pricing generally presume the goal of the company would be to maximize profit while making the greatest use of present capability. In decentralized companies, selection power for investment is assigned to department supervisors whose capital budgets comprise sales from internal transfers. When a selling department is under capacity, a transfer price is suggested by economic theory based on discrepancy cost. Economic theory advocates a transfer price based on differential cost when a selling office is under capacity. Therefore, some investments that would have raised corporate shareholder value will be rejected by department supervisors. Marketplace-based transfer pricing beats this battle by allocating savings on inter-firm trades to the department that was selling. Nevertheless, marketplace transfer pricing may bring about shortfalls to corporate gain. However, we argue in favor of using transfer pricing on the assumption that long term value creation takes precedence over short term gain.

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