1. Goliath Transfer Pricing Case
An Instructional Case by
Charles Bailey & Denton Collins
Published in Journal of Accounting Education, 2006

2. Objectives and Features
Illustrates the issues associated with setting a firm’s transfer pricing policies.
Shows how policy choice can lead to good or bad insourcing/outsourcing decisions.
Overview:
Students to assume the roles of top management and divisional management in negotiating transfer prices.
The simulation requires first that the CEO select a transfer pricing policy from four possible mechanisms: market-based, cost-based, negotiated, and “dual” pricing.
Following the CEO’s policy decision, the divisional managers decide whether to deal internally or externally based on their respective negotiation.
Classroom discussion examines the process and outcomes .

3. Procedures
Assign “companies” (groups of 4 students) and pass out materials:
1 CEO, 3 divisional-manager roles
CEO sets TP policy.
Divisional managers negotiate for their needs according to instructions.
Meanwhile, CEO considers what the divisional managers should do for the overall welfare of Goliath.
CEO observes but does not interfere. Be prepared to discuss the merits of division managers’ actual decisions.
CEO has full package to see the decisions divisional managers face.

4. Procedures, continued Tabulate the results of negotiations.
Give everyone full package, discuss results.
Were the results in the best interest of of Goliath as a whole?
Look at theoretical effects of the methods on managers’ decisions

5. Possible TP Schemes in the Case
In keeping with maximum autonomy, you [the CEO] allow divisions to accept or reject any offer to buy or sell to another division. However, whenever an internal transaction does occur, the price must follow guidelines that you set. Here are the options you are considering.
Market-based: actual competitive prices that the buyer would have to pay outsiders, less 2% to adjust for the economies of dealing internally (less sales effort, no bad debts, etc.).
Cost-based: actual full manufacturing cost.
Negotiated: whatever price the two parties can agree on.
Dual: [NOT USED]
The selling division receives 120% of its full manufacturing costs.
The buying division pays 98% × (the market price they would pay outsiders).

6. Last of 4/24 presentation