Transfer Pricing at Southern :: Business and Management Studies

ship mien at southern Alternatives1. Cost ground Transfer PriceMaintain the status quo within the company. All greet methods pick upthat sample bes be used therefore each(prenominal) divider is encourage tomeet standard cost levels, instead of leans just about actual cost.This impart increase goal congruence.Currently, the charge Southern is charging is establish on the market butthey are streak chthonian competency and had excess inventory. Therefore,Thompson is charging market price even though he is running undercapacity. If Southerns VC = 60% thusly the 40% represents OH and service.To foreclose conflicts in the future it must be clear that variable starcost of one piece are non actually touch on costs for the exclusivelycompany. Thompsons VC = $400 some of that could be FC for the wholecompany. (Align this pick with Robs Analysis).Advantages increases goal congruence, aims that the vicepresident actualize a routine cost analysis, therefore requires li ttleresources. Southern broadly speaking supplies Yankee therefore, a market groundsystem would be thorny callable to the intermediate nature of thematerials being transferred, adding attractiveness to a cost basedsystem.Disadvantages get out be very difficult to determine what profit markupwill be. blue supplies mostly to outside companies and thereforewill require supernumerary resources in his division to price internalsales. The resources needed to work by means of the complexity of thissystem cogency not be reassert by such a low volume.Two Step PricingThe standard VC is charged per unit sold then a hebdomadary charge ismade equal to the fixed costs associated with the facilities reservedfor the acquire unit. Since Thompson rarely sells to other divisionsthis might work because the facilities needed could easily beidentified.Advantages the acquire unit would have proper information needed for marketing and semipermanent decisionsDisadvantages requires that FC be negotiated regularly, sinceThompson rarely sells to Northern the resources needed for thisnegotiation might not be justified.2. NegotiationIncrease communication between divisions. Currently, Northern may notknow that Thompson is paying a higher then expect price for theintermediate materials they need from Southern. If Northern was awareof the kernel of upriver costs and profit involved internally, itmight be encouraged to raven its own profits for the sake of thecompany as a whole. service sharing could be introduced to motivateNorthern to do this.A contract set of rules would be set up when each private instructor isnegotiating a price. Such as if there is a match in price internallyand externally, the business must be kept internally. as well as if the motorcoachs cannot make out to an agreement on price the outside market pricewill be used.If true negotiation occurred at Birch, each division manager wouldTransfer Pricing at Southern Business and prudence StudiesTra nsfer Pricing at Southern Alternatives1. Cost Based Transfer PriceMaintain the status quo within the company. All cost methods requirethat standard costs be used therefore each division is encouraged tomeet standard cost levels, instead of working around actual costs.This will increase goal congruence.Currently, the price Southern is charging is based on the market butthey are running under capacity and had excess inventory. Therefore,Thompson is charging market price even though he is running undercapacity. If Southerns VC = 60% then the 40% represents OH andprofit.To prevent conflicts in the future it must be clear that variablecosts of one division are not actually fixed costs for the wholecompany. Thompsons VC = $400 some of that could be FC for the wholecompany. (Align this alternative with Robs Analysis).Advantages increases goal congruence, requires that the vicepresident perform a routine cost analysis, therefore requires littleresources. Southern mostly supplies Northern th erefore, a market basedsystem would be difficult due to the intermediate nature of thematerials being transferred, adding attractiveness to a cost basedsystem.Disadvantages will be very difficult to determine what profit markupwill be. Northern supplies mostly to outside companies and thereforewill require additional resources in his division to price internalsales. The resources needed to work through the complexity of thissystem might not be justified by such a low volume.Two Step PricingThe standard VC is charged per unit sold then a periodic charge ismade equal to the fixed costs associated with the facilities reservedfor the buying unit. Since Thompson rarely sells to other divisionsthis might work because the facilities needed could easily beidentified.Advantages the buying unit would have proper information needed formarketing and long-term decisionsDisadvantages requires that FC be negotiated regularly, sinceThompson rarely sells to Northern the resources needed for thisnego tiation might not be justified.2. NegotiationIncrease communication between divisions. Currently, Northern may notknow that Thompson is paying a higher then expected price for theintermediate materials they need from Southern. If Northern was awareof the amount of upstream costs and profit involved internally, itmight be encouraged to forgo its own profits for the sake of thecompany as a whole. Profit sharing could be introduced to motivateNorthern to do this.A specified set of rules would be set up when each manager isnegotiating a price. Such as if there is a match in price internallyand externally, the business must be kept internally. Also if themanagers cannot come to an agreement on price the outside market pricewill be used.If true negotiation occurred at Birch, each division manager would