2 Class Announcements Service Learning Assignment: Schedule a meeting with Danika Leblanc prior to contacting your organizationSee Service Learning Project on-lineSee M Oxner if not assigned to a projectNext class – In lieu of class (both sections) – Leadership Forum at 2:15pm in SCHW 110. Speaker – Richard Peddie, Former CEO Maple Leaf Sports and EntertainmentAssignment #2 due February 10, available on-lineMidterm February 19th (Wednesday)- discussed at end of classOffice hours on Wednesday 9:00am-12:00noonBusiness Banquet - April 2nd – 5:45-8pm, Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia
7 Transfer Pricing: Purposes 9-7Transfer Pricing: Purposes1) Promote goal congruence2) To guide managers to decide whether to buy internally or externallya 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 company’s profit).3) To evaluate segment performance4) To minimize taxes, duties & tariffs for multinationals5) Preserve autonomy
8 Transfer Pricing: Rule 9-8Transfer Pricing: RuleTransfer Price = Incremental Cost+ Opportunity CostIncremental cost is additional cost of producing ad transferring a product or serviceOpportunity cost is the maximum contribution margin foregone by selling if product or service is transferred internally.Transfer price depends on capacityExcess capacity – TP=Incremental CostNo excess capacity – TP= Incremental Cost+ Opp Cost
12 Transfer Pricing: 1.Market-Based 9-12Transfer Pricing: 1.Market-BasedAdvantages:i) avoids routinely bogging down negotiationsii) if no idle capacity, market price is the perfect choiceiii) external segmented reporting using market priceDisadvantages:i) market prices are not always knownii) may reduce possibility of generating benefits through cooperation
14 Transfer Pricing: 2.Cost-Based 9-14Transfer Pricing: 2.Cost-BasedAdvantages:i) commonly used in practiceii) easily understood and convenient to useDisadvantages: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)
18 Transfer Pricing: 3.Hybrid 9-18Transfer Pricing: 3.HybridDisadvantages of Negotiated Transfer Price:i) time consumingii) 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.