MCOM 2nd Year Transfer Price In International Marketing Study Notes Study Material Notes Sample Model Paper In Our Site a2znotes.com
TRANSFER PRICE IN INTERNATIONAL MARKETING
Transfer pricing refers to the pricing of goods and services bought and sold operating units or divisions of a single company. In other words, transfer fricing concerns intra corporation exchanges transactions between buyer and Beller that have the same corporate parent. For example : Toyota subsidiaries lell to and buy from each other. The same is true of other companies operating clobally. As companies expand and create decentralised operations profit Jenteres have become increasingly important factor in the overall corporate inancial pictures.
Appropriate incorporate transfer pricing systems and policies are required o ensure profitability at each level. When a company extends its operations icross national boundaries, transfer pricing taken on new dimensions and complications. In determining transfer prices to subsidiaries, global companies hust address a number of issues including taxes and duties, tariffs, country’s Trofit transfer rules, conflicting objectives of joint venture partners and Sovernment regulations.
1 There are three major alternative approaches to transfer pricing. The Ipproach used will vary with the nature of the firm products markets and the istorical circumstances of each case. The alternatives are :
1. Market Based Transfer Pricing. A market based transfer price is “Terived from the price required to be competitive in the international market. The constraint on this price is cost. However, there is a considerable degree of dyariation in how costs are defined. Because costs generally decline with volume, my decision must be made regarding whether to price on the basis of current or
lanned volume levels. To use market based transfer prices to enter a new market That is too small to support local manufacturing third country sourcing may be eGequired. This enables a company to establish its names or franchise in the market without committing to a major capital investment.
2. Negotiated Transfer Prices. A second alternative is negotiated transfer esprices. This alternative allows the organisation’s affiliates to negotiates transfer -fibrices among themselves. In some instances, the final transfer price may reflect bosts and market prices. But this is not a requirement. The gold standard of TVnegotiated transfer price is known as an arm’s length price. It is the price that littwo independent, and unrelated entities would negotiate.
3. Cost Based Transfer Pricing. Some companies use the cost based s, approach may arrive at transfer prices that reflect variable and fixed inmanufacturing costs only. Alternatively, transfer prices may be based on full costs, including overhead costs, marketing, research and development (R&D) neland other functional areas. The way costs are defined may have an impact on antarrifs and duties on sales to affiliates and subsidiaries by global companies.
Cost plus pricing is a variation of the cost based approach. Companies that follow the cost plus pricing method are taking the position that profit must be shown for any product or service at every stage of movement through the corporate system. In such an instance transfer prices may be set at a certain percentage of fixed cost such as 110 per cent of cost while cost plus pricing may
result in a price that is completely unrelated to competitive or demand condi in international markets, many exporters use this approach successfully