Lecture 7: Pricing and Intra Company Transfers
Decentralization:
The benefits:
(1) Creates greater responsiveness to local needs; better informed about their
customers, competitors, suppliers, employees and about factors
influencing the performance of their jobs such as ways to decrease costs
and increase quality.
(2) Leads to quicker decision making.
(3) Increases motivation.
(4) Aids management development and learning.
(5) Sharpens the focus of managers; better able to adapt to fast developing
market opportunities.
The problem - the structure of the organization and performance:
• Many firms use business models that are decentralized, allowing
managers to make decisions for their division.
• Decentralization can stimulate market conditions within a company
between autonomously acting business units.
• The role of performance measurement and performance assessment
within responsibility centers is critical, leading managers to consider
transfer prices.
• Even in cases where the buyer is not permitted to buy externally, a
transfer price will influence the level of output of the buying and selling
divisions.
Transfer pricing defined:
• A transfer price is the price charged when one segment of a company
(i.e. A business unit, division, department) provide goods (intermediate
products) to another segment of the company.
• Treats business unit managers decisions as identical to the decisions of
the group’s top managers
The goal in using transfer prices is to motivate managers to act in the
best interest of the overall company!
Functions of transfer pricing:
Decentralization:
The benefits:
(1) Creates greater responsiveness to local needs; better informed about their
customers, competitors, suppliers, employees and about factors
influencing the performance of their jobs such as ways to decrease costs
and increase quality.
(2) Leads to quicker decision making.
(3) Increases motivation.
(4) Aids management development and learning.
(5) Sharpens the focus of managers; better able to adapt to fast developing
market opportunities.
The problem - the structure of the organization and performance:
• Many firms use business models that are decentralized, allowing
managers to make decisions for their division.
• Decentralization can stimulate market conditions within a company
between autonomously acting business units.
• The role of performance measurement and performance assessment
within responsibility centers is critical, leading managers to consider
transfer prices.
• Even in cases where the buyer is not permitted to buy externally, a
transfer price will influence the level of output of the buying and selling
divisions.
Transfer pricing defined:
• A transfer price is the price charged when one segment of a company
(i.e. A business unit, division, department) provide goods (intermediate
products) to another segment of the company.
• Treats business unit managers decisions as identical to the decisions of
the group’s top managers
The goal in using transfer prices is to motivate managers to act in the
best interest of the overall company!
Functions of transfer pricing:
