Application: Transfer Pricing Decisions

As a manager, you may be tasked with making recommendations as to how your organization should structure its transfer pricing. This is especially true in cases when both variable or full cost transfer pricing is acceptable, and the choice is not obvious.

Reflect on the scenario presented and consider how transfer pricing decisions might apply to organizational decision making.

Phipps manufactures circuit boards in Division A, a country with a 30% income tax rate, and transfers them to Division B, a country with a 40% income tax. An import duty of 15% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The circuit boards' full cost is $1,000 and variable cost is $700; they are sold by Division B for $1,200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.

The Assignment:

• Part 1:Analyze the effect of both full-cost and variable-cost transfer pricing methods on Phipps’ cash flows using a spreadsheet program such as Excel.
• Part 2:Make your recommendation as to how the organization should proceed, being sure to justify your recommendation with examples form this week’s resources, and/or additional research. Complete this aspect of the Assignment by using a word processing program such as Word.