Transfer Pricing Essay Example | Topics and Well Written Essays - 1250 words

Transfer Pricing - Essay ExampleIt is usually applied when bodies are separate entities and are individually responsible for their favorableness and divisions are accountable for their own profits (Jensen and Meckling, 1976, 315). Since transfer pricing is an agreement between two divisions of same root word there is greater chance of contest of interest as both buying and exchange side try to transfer to counter party resulting increased benefit to its division (Chan, Landry, and Jalbert , 2004, 39). This report go forth also analyze a case between Millwall Company and Reading Company as both these companies are interested in buying and marketing with each other and both of these companies belong to the same group of companies. EFEFCTOF EACH PROPOSED PRICE ON MANAGEMENT OF READING The transfer price mechanism is the blood line of revenue for interchange division which in this case is Reading Company and hail for buying division which in mentioned case is Millwall Company. F ormer aims to get it maximal revenue from deal and latter tries to get supply at minimum cost. The best option nookie, therefore, be negotiated at point where both firms are wedded autonomy as at long last they will be held responsible for the profitability of the respective divisions (Grubert and Joel Slemrod , 1998, 368). Considering the fact that Reading Company is already performing under capacity, therefore, it can serve Millwall Company without reducing its supply to other external suppliers and so no opportunity cost would be involved in this scenario. With these assumptions, standard uncertain cost and opportunity cost would be the total cost that it has to incur. Since opportunity cost is nil in this case then standard multivariate cost constitutes main component of cost and any point to a higher place this would be the profit. Using its spare capacity, selling at any price over and above the average variable price would increase the profit for Reading Company by sam e amount. For instance, Profit for Reading family = (selling price average variable price) * quantity In the given case price demanded by Reading Company is inclusive of fixed cost as well and only selling and distribution cost is foregone. It is in due alignment with the need of Reading Company as it has to keep profitability improved with its operation under capacity. support from Millwall Company is true on its part as it is well calculated from buyers current condition of operating under capacity and it would homogeneous to pay minimum or at least less than what it would pay to an external supplier to improve its profitability. But management of Reading Company would for certain not like this scenario as it would not benefit the profitability of the company as selling the same product to an external buyer give the company revenue of $ 13per unit. Supplying on the price given by Millwall Company would only then improve the profitability of Millwall Company and this can raise an intra-company conflict of interest and reduction in its revenue will reduce its profit. The best Reading Company is ready to forego its profit by $1.20, which is the market selling price less price offered to Millwall Company. For the price offered by management is less than the one asked by Reading company. This price has already covered the cost and the delimitation that is suggested to be foregone and it is higher than the Readings acceptable price. This price is also not considered suitable for overall profitability of group as it would reelect a profit of $ 3 per unit (price $13 cost $10) if sold to outsider and this managements suggested price would reduce the profit of overall group by $2.88 (13- 10.12) and loss in profit is $1.68 (11.80- 10.12) above than profit Reading company is ready to forego. In point of ROI comparison Reading company would finally be held for less profitability overall.