Presentation on theme: "TRANSFER PRICING rights reserved.. Class Announcements Service Learning Assignment: Schedule a meeting with Danika Leblanc ( prior to."— Presentation transcript:
TRANSFER PRICING rights reserved.
Class Announcements Service Learning Assignment: Schedule a meeting with Danika Leblanc ( prior to contacting your organization See Service Learning Project on-line See M Oxner if not assigned to a project Next class – In lieu of class (both sections) – Leadership Forum at 2:15pm in SCHW 110. Speaker – Richard Peddie, Former CEO Maple Leaf Sports and Entertainment Assignment #2 due February 10, available on-line Midterm February 19 th (Wednesday)- discussed at end of class Office hours on Wednesday 9:00am-12:00noon Business Banquet - April 2nd – 5:45-8pm, Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia
Class Objectives 1. Understanding transfer pricing as an internal pricing mechanism 2. Understanding transfer pricing as a means for evaluation 3. Consider the implications of transfer pricing on behaviour
Transfer Pricing: Purposes 1) Promote goal congruence 2) To guide managers to decide whether to buy internally or externally a good transfer price is one that induces division managers to do whatever is in the best interest of the entire company otherwise sub optimization (i.e. each division manager makes a decision to maximizes the companys profit). 3) To evaluate segment performance 4) To minimize taxes, duties & tariffs for multinationals 5) Preserve autonomy
Transfer Pricing: Rule Transfer Price = Incremental Cost+ Opportunity Cost Incremental cost is additional cost of producing ad transferring a product or service Opportunity cost is the maximum contribution margin foregone by selling if product or service is transferred internally. Transfer price depends on capacity Excess capacity – TP=Incremental Cost No excess capacity – TP= Incremental Cost+ Opp Cost
Transfer Pricing: 1.Market-Based Advantages: i) avoids routinely bogging down negotiations ii) if no idle capacity, market price is the perfect choice iii) external segmented reporting using market price Disadvantages: i) market prices are not always known ii) may reduce possibility of generating benefits through cooperation
Transfer Pricing: 2.Cost-Based Advantages: i) commonly used in practice ii) easily understood and convenient to use Disadvantages: i) distinction between fixed and variable costs are blurred (absorption cost leads to dysfunctional behavior) ii) since inefficiencies are passed on, lacks incentive to control expenditures/assets (standards avoid this)
Transfer Pricing: 3.Hybrid Disadvantages of Negotiated Transfer Price: i) time consuming ii) may lead to bad blood between mangers of different subunit; Given the disputes that often accompany the negotiation process, most companies rely on some other means of setting transfer prices. iii) If managers are pitted against each other rather than against their past performance or reasonable benchmarks, a non- cooperative atmosphere is almost guaranteed. Note: The principles of decentralization suggest that companies should grant managers autonomy to set transfer prices and to decide whether to sell internally or externally, even is this may occasionally result in suboptimal decisions.
Transfer Pricing: International Transfer Pricing Objectives Domestic Greater divisional autonomy Greater motivation for managers Better performance evaluation Better goal congruence International Less taxes, duties, and tariffs Less foreign exchange risks Better competitive position Better governmental relations
Friday, Wednesday February19th(in-class) Worth: 30% Coverage: Chpts. 6, 7, 8, 22 (p ), 23 (p ) Format: Short answer questions with multiple parts No – multiple choice, journal entries, ethics Answer for only THREE of the four questions; each question is worth 25 points. Preparation: Problems On-line Lecture Notes On-line Additional Office Hours: Tuesday 18 th – 11:00am – 1:00pm (normally none) Wednesday 19 th – 9:00am – 2:00pm (normally 11:00am – 2:00pm) Midterm