SWIN BUR * NE * SWINBURNE UNIVERSITY OF TECHNOLOGY SARAWAK CAMPUS Swinburne University of Technology Faculty of Business and Design ACC30009/HBC229N Analysis for Competitive Advantage Topic 7: Transfer Pricing & International Issues LEARNING OBJECTIVES After working through this topic, you will be able to: 1. Describe the role of transfer pricing in the decentralised firm 2. Evaluate divisional performance when transfer pricing is involved 3. Define and differentiate the three methods of transfer pricing 4. Calculate possible transfer prices in specific situations 5. Incorporate international issues such as foreign exchange and country-specific taxes on transfer price and performance evaluation LECTURE OUTLINE 1. Transfer pricing: context; impact on performance; aims and problems; general rule 2. Impact of transfer pricing on divisional, firm-wide and managerial performance. 3. Transfer pricing methods: market-based, cost-based and negotiated; dual transfer pricing Calculating transfer price => applying the general rule 4. Illustrative Example 1: Gladioli Aluminium Ltd (see attached handout page 3) 1 Lecture Example: A & R Ltd (see powerpoint slide number 13) 5. International issues and multinational transfers > Illustrative Example 2: Forever Diamonds Inc (see attached handout page 4) ESSENTIAL READING: . Chapter 12, L-S, T&H, pp. 558-565; 571-604 TUTORIAL QUESTIONS: Questions from L-S, T&H: > Chapter 12 - 12.1 ; 12.15 ; 12.17 ; 12.19 Exercises & Problems from L-S, T&H: Chapter 12 - E12.29 ; E12.30 ; P12.37 ; P12.39 ; P12.40 Additional Tutorial Question (Past Exam Question) 1 See attached on page 5 of this handout. Problems for Self Study : See attached on page 6 of this handout. 1
TRANSFER PRICING Transfer pricing affects the transferring divisions and overall firm through its impact on divisional performance measures, firmwide profits, and divisional autonomy. Transfer prices are prices charged for goods transferred between two divisions of the same firm. The output of the selling division is used as input of the buying division. The price charged for transferred goods is revenue to the selling division and cost of goods sold to the buying division. Thus, profits and profit-based performance measures (ROI and EVA) of both divisions are affected by the transfer price. The transfer pricing problem concerns finding a transfer pricing system that simultaneously satisfies the following three objectives: 1. Accurate performance evaluation. No one divisional manager should benefit at the expense of another. 2. Goal congruence. Divisional managers are motivated to select actions that maximize firmwide profits. 3. Divisional autonomy. Central management should not interfere with the decision- making freedom of divisional managers. The opportunity cost approach to transfer pricing identifies: the minimum transfer price, which is the transfer price that would leave the selling division indifferent between selling the goods to an outside party or transferring the goods to an internal division the maximum transfer price, which is the transfer price that would leave the buying division indifferent between buying the goods from an outside party or purchasing from an internal division The transferred goods should be transferred internally whenever the opportunity cost (minimum price) of the selling division is