1. Transfer Pricing & Utilizing Assets Employed
Chapters 5 & 6,
Management Control Systems, 12th Ed.,
Anthony and Govindarajan

2. Transfer Pricing
The pricing system for the transfer of goods or services between two profit centers within the same organization.
Can also apply to services provided by corporate staff units.

3. Objectives of a Transfer Price
Provide relevant info to provide for optimum company profits
Induce goal congruent decisions
Measure economic performance
Simple and easy to understand

4. Fundamental Principle
The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors. [Text, p. 202]

5. Various Situations Market Price Constrained Cost-Based Limited Markets
Excess / Shortage of Industry Capacity
Cost-Based
Cost Basis
Profit Markup

6. Various Situations Upstream Fixed Costs and Profits
Agreement (meet periodically and determine)
Two-Step (combine variable & fixed costs)
Profit Sharing
Two Sets of Prices (outside sales price & standard cost)

7. Corporate Services Control over Service Provided
Optional Use of that Service
Simplicity of Pricing

8. Transfer Price Administration
Negotiation
Arbitration / Conflict Resolution
Product Classification

9. Measuring and Controlling Assets Employed
The terms “profit center” and “investment center” are often used interchangeably
Profit center measured on profit in relation to a profit target
Investment center measured on return on the assets used to earn profit

10. Assets Current Plant, Property, & Equipment Leased Idle Intangible
Cash
Receivables
Inventories
Plant, Property, & Equipment
Leased
Idle
Intangible

11. Definitions Return of Investment (ROI) Economic Value Added (EVA)
A Ratio (Income Statement & Balance Sheet)
Income / Assets Employed
Economic Value Added (EVA)
A Dollar Amount
Net Operating Profit – Capital Charge

12. Why Use EVA? Profit objectives are consistent
Investments yielding above cost of capital are attractive
Different interest rates may be used for different investments
Causes the creation and growth of added value for the corporation

13. EVA Calculation EVA = Net Operating Profit – Capital Charge Where OR
Capital Charge = Cost of Capital * Capital Employed
Cost of Capital is Weighted Average OR
EVA = Capital Charge * (ROI – Cost of Capital)