T r a ns f e rpr i c esar eal mos ti ne vi t a bl yne ede dwhe ne v erabus i ne ssi s di v i de di nt omor et ha nonede pa r t me ntordi v i s i on I nac c ount i ng,man yamount sc anbel egi t i mat el yc al c ul at edi nanumberof di ff er entwa y sandc anbecor r ec t l yr epr es ent edb yanumberofdi ff er ent v al ues .Forex ampl e,bot hmar gi nal andt ot al abs or pt i onc os tc an s i mul t aneous l ygi v et hec or r ec tc os tofpr oduc t i on,butwhi c hv er s i onofc os t y o us h ou l du s ed ep en dso nwh aty o ua r et r y i n gt od o. Si mi l ar l y , t hebas i sonwhi c hfi x edo v er headsar eappor t i onedandabs or bed i nt opr oduc t i onc anr adi c al l ychangeper c ei v edpr ofi t abi l i t y .Thedangeri st hat dec i s i onsar eof t enbas edonac c ount i ngfi gur es ,andi ft hefi gur est hems el v es ar es omewhatar bi t r ar y , s ot oowi l l bet hedec i s i onsbas edont hem.You s houl d,t her ef or e,al way sbec ar ef ul whenus i ngac count i ngi nf or mat i on,not j us tbec aus ei nf or mat i onc oul dhav ebeendel i ber at el ymani pul at edand pr es en t edi nawa ywh i c hmi s l ea ds ,b uta l s obe c aus et hei nf o r mat i o nd epe nd s ont heas s umpt i onsandt hemet hodol ogyus edt oc r eat ei t .T r ans f erpr i c i ng pr ov i desex cel l entex ampl esoft hec oex i s t enc eofal t er nat i v el egi t i mat ev i ews , andi l l us t r at eshowt heus eofi nappr opr i at efi gur escanc r eat emi s c onc ept i ons andca nl ea dt owr on gd ec i s i on s.
WHENTRANSFERPRI CESARENEEDED T r ans f erpr i c esar eal mos ti nev i t abl yneededwhenev erabus i nes si sdi v i ded i nt omor et hanonedepar t mentordi v i s i on.Us ual l y ,goodsors er v i c eswi l l fl ow bet weent hedi v i s i onsandeac hwi l l r epor ti t sper f or manc es epar at el y .The ac c ount i ngs y st em wi l l us ual l yr ec or dgoodsors er v i c esl ea vi ngone d ep ar t me nta nde nt e r i n gt h en ex t ,a nds o memo me ne t a r yv a l u emu s tb eu s edt o r ec or dt hi s .Thatmonet ar yv al uei st het r ans f erpr i c e.Thet r ans f erpr i c e neg ot i at edb et we ent hedi v i s i o ns ,ori mpos e db yhe adoffic e,c a nh av ea pr of ound,butper hapsar bi t r ar y ,eff ec tont her epor t edper f or manc eand subsequentdeci si onsma made.
Exa mpl e1 abl e1,i T ak et hef ol l owi ngsc enar i os howni nT nwhi c hDi v i s i onAmak es c omponent sf orac os tof$30,andt hes ear et r ans f er r edt oDi v i s i onBf or$50. Di v i s i o nBb uy st hec omp one nt si nat$5 0,i n c ur sownc os t sof$ 20,a ndt he n s el l st oout s i dec us t omer sf or$90.
Ast hi ngsst and,eac hdi v i s i onmak esapr ofi tof$20/ uni t ,andi ts houl dbe eas yt os eet hatt hegr oupwi l l mak eapr ofi tof$40/ uni t .Youc anc al c ul at et hi s ei t herbysi mpl yaddi ngt het wodi v i s i onal pr ofi t st oget her( $20+$20=$40)or s ub t r a ct i ngbo t hownc os t sf r om fi n al r e v enue( $ 90–$ 30–$2 0=$4 0) . Youwi l l appr ec i at et hatf orev er y$1i nc r eas ei nt het r ans f erpr i c e,Di v i s i onA wi l l mak e$1mor epr ofi t ,andDi v i s i onBwi l l mak e$1l es s .Mat hemat i c al l y , t he gr oupwi l l mak et hes amepr ofi t ,butt hes ec hangi ngpr ofi t scanr es ul ti neac h di v i s i onmak i ngdi ff er entdec i s i ons ,andasar es ul toft hos edec i s i ons ,gr oup pr o fit smi ghtb eaff ec t e d. Cons i dert hek noc k oneffec t st hatdi ffer entt r ans f erpr i c esanddi ffer entpr ofi t s mi ghtha v eont hedi v i s i ons : Thes uc c es sofe ac hd i v i s i o n,wh et he rmeas ur e d Per f or manceeval uat i on. byr et ur noni nv es t ment( ROI )orr es i dual i nc ome( RI )wi l l bechanged.Thes e meas ur esmi ghtbei nt er pr et edasi ndi c at i ngt hatadi v i s i on’ sper f or manc ewas uns at i s f ac t or ya ndc ou l dt emp tma nage mentathe adoffic et oc l os ei td own. Pe r f or ma nc er e l a t e dpa y . I ft her ei sas ys t em ofper f or manc er el at edpay , t her emuner at i onofempl oy eesi neac hdi v i s i onwi l l beaff ec t edaspr ofi t s c hange.I ft heyf eel t hatt hei rr emuner at i oni saffec t edunf ai r l y ,empl oy ees ’ mo r a l ewi l l b ed ama ge d. I ft het r ans f erpr i c ei sv er yhi gh,t he Make/ abandon/ buyi ndeci si ons. r ec ei v i ngdi v i s i onmi ghtdec i denott obuyan yc omponent sf r om t he t r ans f er r i ngdi v i s i onbec aus ei tbec omesi mpos si bl ef ori tt omak eapos i t i v e c ont r i but i on.Thatdi v i s i onmi ghtdec i det oabandont hepr oduc tl i neorbuy i n c he aperc omp one nt sf r om o ut s i des up pl i er s . Mot i v at i on. Ev er y onel i k est omak eapr ofi tandt hi sambi t i onc er t ai nl yappl i es t ot hedi v i s i onal manager s .I fat r ans f erpr i c ewass uc ht hatonedi v i s i onf ound i ti mpos si bl et omak eapr ofi t ,t hent heempl oy eesi nt hatdi v i s i onwoul d pr obabl ybedemot i v at ed.I nc ont r as t ,t heot herdi v i s i onwoul dha v eaneas y r i deasi twoul dmak epr ofi t seas i l y , andi twoul dnotbemot i v at edt owor k mor eeffic i ent l y . Ne wi n v es t ments houl dt y pi c al l ybee v al uat edus i nga I nv es t me nta ppr a i s al . me t h ods uc ha sne tp r es entv a l ue .Ho we v er ,t hec as hi nfl o wsar i s i ngf r om an i nv es t mentar eal mos tc er t ai nl ygoi ngt obeaffec t edbyt het r ans f erpr i c e,s o c api t al i nv es t mentdec i s i onscandependont het r ans f erpr i c e. I ft hedi v i s i onsar ei ndi ffer entc ount r i es ,t he T ax at i ona ndpr ofitr e mi t t a nc e. pr ofi t sear nedi neac hc ount r ywi l l dependont r ans f erpr i c es .Thi scoul daff ec t t heo v er al l t axbur denoft hegr oupandcoul dal s oaff ec tt heamountofpr ofi t s t h atn eedt ob er emi t t e dt ohe ado ffic e. Asy ouc ans ee,t her ef or e,t r ans f erpr i c esc anha v eapr of oundeff ec tongr oup per f or manc ebec aus et he yaff ec tdi v i s i onal per f or manc e,mot i v at i onand
dec i s i o nmak i n g.
THECHARACTERI STI CSOFAGOODTRANSFERPRI CE Al t houghnoteas yt oat t ai ns i mul t aneous l y ,agoodt r ans f erpr i c es houl d: mos ti nev i t abl y ,di v i s i onal i s at i oni s Pr e se r v edi v i s i ona la ut onomy:al ac c ompani edb yadegr eeofdec ent r al i s at i oni ndec i s i onmak i ngs ot hat s pe c i fi cma nage r sa ndt e amsa r eputi nc har geofe ac hd i v i s i onan dmus tr u n i tt ot hebes toft hei rabi l i t y .Di v i s i onal manager sar et her ef or el i k el yt or es ent bei ngt ol db yheadoffic ewhi c hpr oduc t st he ys houl dmak eands el l .I deal l y , di v i s i onss houl dbegi v enas i mpl e,under s t andabl eobj ec t i v es uc has max i mi s i ngdi v i s i onal pr ofi t . Bepe r c ei v eda sbe i ngf a i rf ort hepur pos esofpe r f or ma nc ee v al ua t i on andi nvest mentdeci si ons. ofi t sar emot i v at i ngandal l ow Per mi teachdi vi si ont omakeapr ofit:pr di v i s i onal per f or manc et obemeas ur edus i ngpos i t i v eROIorpos i t i v eRI . Encour agedi vi si onst omakedeci si onswhi chmaxi mi segr ouppr ofit s: t het r ans f erpr i c ewi l l ac hi ev et hi si ft hedec i s i onswhi c hmax i mi s edi v i s i onal pr ofi tal s ohappent omax i mi s egr ouppr ofi t–t hi si sk no wnasgoal c ongr uenc e.Fur t her mor e,al l di v i s i onsmus twantt odot hes amet hi ng. Ther e’ snopoi nti nt r ans f er r i ngdi v i s i onsbei ngv er yk eenont r ans f er r i ngouti f t henex tdi v i s i ondoes n’ twantt ot r ans f eri n.
POSSI BLETRANSFERPRI CES I nt hef ol l owi ngex ampl es ,as sumet hatDi v i s i onAc ans el l onl yt oDi v i s i onB, andt hatDi v i s i onB’ sonl ysour c eofc omponent si sDi v i s i onA.Exa mpl e1has bee nr ep r o du ce dbu twi t hc os t ss pl i tbe t wee nv a r i abl ea ndfi x e d.As ome wh at ar bi t r ar yt r ans f erpr i c eof$50hasbeenus edi ni t i al l yandt hi sal l owseac h di v i s i ont omak eapr ofi tof$20.
Exa mpl e2 abl e2.Thef SeeT ol l owi ngr ul esont r ans f erpr i c esar enec es sar yt ogetbot h par t i est ot r adewi t honeanot her : Fort het r ans f er outdi v i s i on,t het r ans f erpr i c emus tbegr eat ert han( orequal t o)t hemar gi nal c os tofpr oduc t i on.Thi sal l owst het r ans f er outdi v i s i ont o mak eac ont r i but i on( oratl eas tnotmak eanegat i v eone) .I n Exa he mpl e2,t
t r ans f erpr i c emus tbenol owert han$18.At r ans f erpr i c eof$19,f orex ampl e, woul dnotbeaspopul arwi t hDi v i s i onAaswoul dat r ans f erpr i c eof$50,but atl eas ti toffer st hepr os pec tofc ont r i but i on,ev ent ual br eak ev enandpr ofi t . Fort het r ans f er i ndi v i s i on,t het r ans f eri npr i c epl usi t sownmar gi nal c os t s mus tbenogr eat ert hant hemar gi nal r ev enueear nedf r om out s i des al es .Thi s al l owst hatdi v i s i ont omak eac ont r i but i on( oratl eas tnotmak eanegat i v e one) .I nExa het r ans f erpr i c emus tbenohi ghert han$80as : mpl e2,t $80( t r ans f er i npr i c e)+$10( ownv ar i abl ecos t )=$90( mar gi nal r ev enue) Us ual l y ,t hi sr u l ei sr es t at edt os ayt hatt het r ans f erpr i c es houl dbenogr eat er t hant henetmar gi nal r ev enueoft her ec ei v i ngdi v i s i on,wher et henetmar gi nal r ev enuei smar gi nal r ev enuel es sownmar gi nal c os t s .Her e,ne tmar gi nal r evenues=$80=$90–$10. So,at r ans f erpr i c eof$50( t r ans f erpr i c e≥$18,≤$80) ,assetabov e,wi l l wor ki ns of arasbot hpar t i eswi l l fi ndi twor t ht r adi ngatt hatpr i c e.
THEECONOMI CTRANSFERPRI CERULE Theec onomi ct r ans f erpr i c er ul ei sasf ol l ows : Mi ni mum ( fi x edbyt r ans f er r i ngdi v i s i on) Tr ans f erpr i c e≥mar gi nal c os toft r ans f er outdi v i s i on And Max i mum ( fi x edbyr ec ei v i ngdi v i s i on) Tr ans f erpr i c e≤netmar gi nal r ev enueoft r ans f er i ndi v i s i on Aswel l asper mi t t i ngi nt er di v i s i onal t r adet ohappenatal l ,t hi sr ul ewi l l al s o gi v et hec or r ec tec onomi cdec i s i onbec aus ei ft hefi nal s el l i ngpr i c ei st ool ow f ort hegr oupt omak eapos i t i v ec ont r i but i on,nooper at i v et r ans f erpr i c ei s av ai l abl e. mpl e2,i So,i nExa ft hefi nal s el l i ngpr i c ewer et of al l t o$25,t hegr oupc oul d notmak eac ont r i but i onbec aus e$25i sl es st hant hegr oup’ st ot al v ar i abl e c os t sof$18+$10.Thet r ans f erpr i c et hatwoul dmak ebot hdi v i s i onst r ade mus tbenol es st han$18( f orDi v i s i onA)butnogr eat ert han$15( net mar gi nal r ev enuef orDi v i s i onB=$25–$10) ,s oc l ear l ynowor k abl et r ans f er pr i c ei sav ai l abl e. I f ,howev er ,t hefi nal s el l i ngpr i c ewer et of al l t o$29,t hegr oupc oul dmak ea $1c ont r i but i onperuni t .Av i abl et r ans f erpr i c ehast obeatl eas t$18( f or Di v i s i onA)andnogr eat ert han$19( netmar gi nal r ev enuef orDi v i s i onB= $29–$10) .At r ans f erpr i c eof$18. 50,s ay ,woul dwor kfi ne. Ther ef or e,al l t hatheadoffic eneedst odoi st oi mpos eat r ans f erpr i c ewi t hi n t heappr opr i at er ange,c onfi dentt hatbot hdi v i s i onswi l l c hoos et oac ti naway
t hatmax i mi s esgr ouppr ofi t .Headoffic et her ef or egi v eseac hdi v i s i ont he i mpr es s i onofmak i ngaut onomousdec i s i ons ,buti nr eal i t yeac hdi v i s i onhas b ee nma ni p ul a t e di n t oma k i n gt h ec h oi c e she adoffic ewa nt s . Not e,howev er ,t hatal t houghweha v ees t abl i s hedt her angeoft r ans f erpr i c es t hatwoul dwor kcor r ec t l yi nt er msofec onomi cdec i s i onmak i ng,t her ei sst i l l Exa mpl e1 pl ent yofs copef orar gument ,di s t or t i onanddi s sat i s f ac t i on. s ugges t edat r ans f erpr i c ebe t ween$18and$80,bute x ac t l ywher et he t r ans f erpr i c ei ss eti nt hatr angev as t l yal t er st heper c ei v edpr ofi t abi l i t yand per f or manc eofeac hs ubuni t .Thehi ghert het r ans f erpr i c e,t hebet t er Di v i s i onAl ook sandt hewor s eDi v i s i onBl ook s( andv i c ev er s a) . mpl e1 I naddi t i on,at r ans f erpr i c er angeasder i v edi nExa and2 wi l l of t enbe dy nami c .I twi l l k eepc hangi ngasbot hv ar i abl epr oduc t i onc os t sandfi nal s el l i ngpr i c eschange,andt hi scanbedi ffic ul tt omanage.I npr ac t i c e, managementwoul dof t enpr ef ert oha v eas i mpl ert r ans f erpr i c er ul eanda mor es t abl et r ans f erpr i c e–butt hi ssi mpl i c i t yr unst her i s kofpoor erdec i s i ons bei ngmade.
PRACTI CALAPPROACHESTO TRANSFERPRI CEFI XI NG I no r de rt oaddr e sst he s ec onc er ns ,s omec ommonpr ac t i c a lapp r oa c he st o t r ans f erpr i c efi x i ngex i s t : At r ans f erpr i c es etequal t ot hev ar i abl ec os toft he 1.Var i abl ecos t t r ans f er r i ngdi v i s i onpr oduc esv er ygoodec onomi cdec i s i ons .I ft het r ans f er pr i c ei s$18,Di v i s i onB’ smar gi nal c os t swoul dbe$28( eac huni tc os t s$18t o buyi nt heni nc ur sanot her$10ofv ar i abl ec os t ) .Thegr oup’ smar gi nal c os t s ar eal s o$28,s ot her ewi l l begoal c ongr uenc ebet weenDi v i s i onB’ swi s ht o max i mi s ei t spr ofi t sandt hegr oupmax i mi s i ngi t spr ofi t s .I fmar gi nal r ev enue ex ceedsmar gi nal c os t sf orDi v i s i onB,i twi l l al s odos of ort hegr oup. Al t houghgoodec onomi cdec i s i onsar el i k el yt or es ul t ,at r ans f erpr i c eequal t o mar gi nal c os thasc er t ai ndr awbac k s : Di v i s i onAwi l l mak eal os sasi t sfix edc os t scannotbec ov er ed.Thi si s demot i v at i ng. Per f o r manc eme as ur eme nti sd i s t o r t ed .Di v i s i o nAi sc on demne dt oma ki ng l os s eswhi l eDi v i s i onBget saneas yr i deasi ti snotc har gedenought oc ov er al l c os t sofmanuf ac t ur e.Thi seffec tc anal s odi s t or ti nv es t mentdec i s i ons madei neac hdi v i s i on.Forex ampl e,Di v i s i onBwi l l enj oyi nfl at edc as hi nfl ows . Ther ei sl i t t l ei nc ent i v ef orDi v i s i onAt obeeffic i enti fal l mar gi nal c os t sar e c ov er edbyt het r ans f erpr i c e.I neffic i enc i esi nDi v i s i onAwi l l bepas sedupt o Di v i s i onB.Ther ef or e,i fmar gi nal c os ti sgoi ngt obeus edasat r ans f erpr i c e, atl eas tmak ei ts t andar dmar gi nal c os t ,s ot hateffic i enc i esandi neffic i enc i es s t aywi t hi nt hedi v i s i onsr es pons i bl ef ort hem.
2.Ful lcost / f ul lcostpl us/ var i abl ecostpl us/ mar ketpr i ce Ex ampl e3. SeeT abl e3. abl e3 At r ans f erpr i c es etatf ul l c os tasshowni nT ( orb et t er ,f ul l s t andar d c os t )i ssl i ght l ymor es at i s f ac t or yf orDi v i s i onAasi tmeanst hati tc anai mt o br eakev en.I t sbi gdr awbac k,howev er ,i st hati tc anl eadt ody sf unc t i onal dec i s i onsbec aus eDi v i s i onBc anmak edec i s i onst hatmax i mi s ei t spr ofi t sbut whi c hwi l l notmax i mi s egr ouppr ofi t s .Fore x ampl e,i ft hefi nal mar k etpr i c e f el l t o$35,Di v i s i onBwoul dnott r adebec aus ei t smar gi nal c os twoul dbe$40 ( t r ans f er i npr i c eof$30andownmar gi nal c os t sof$10) .Howev er ,f r om a gr oupper s pec t i v e,t hemar gi nal c os ti sonl y$28( $18+$10)andapos i t i v e c ont r i but i onwoul dbemadee v enatasel l i ngpr i c eofonl y$35.Headoffic e c oul d,ofc our s e,i ns t r uc tDi v i s i onBt ot r adebutt hendi v i s i onal aut onomyi s c ompr o mi s eda ndDi v i s i o nBma na ge r swi l l r es en tb ei n gi ns t r uc t edt omak e negat i v ec ont r i but i onswhi c hwi l l i mpac tont hei rr epor t edper f or manc e. I magi ney ouar eDi v i s i onB’ smanager ,t r y i ngy ourbes tt ohi tpr ofi tt ar get s , mak ewi s edec i s i ons ,andmov ey ourdi v i s i onf or war dbyc ar ef ul l yev al uat ed c api t al i nv es t ment . pl us Thef ul l c os t appr oac hwoul di nc r eas et het r ans f erpr i c ebyaddi ngamar k u p.Th i swo ul dno w mo t i v a t eDi v i s i o nA,a spr o fi t sc a nb ema det h er ean dma y al s oal l owpr ofi t st obemadebyDi v i s i onB.Howev er ,agai nt hi sc anl eadt o dy sf unc t i onal dec i s i onsast hefi nal s el l i ngpr i c ef al l s . At r ans f erpr i c es ett ot hemar k etpr i c eoft het r ans f er r edgoods( as sumi ngt hat t her ei samar k etf ort hei nt er medi at epr oduc t )s houl dgi v ebot hdi v i s i onst he oppor t uni t yt omak epr ofi t s( i ft heyoper at eatnor mal i ndus t r yeffic i enc i es ) ,but agai ns uc hat r ans f erpr i c er unst her i s kofenc our agi ngdy s f unc t i onal dec i s i on mak i ngast hefi nal s el l i ngpr i c ef al l st owar dst hegr oupmar gi nal c os t . Howev er ,mar k etpr i c ehast hei mpor t antadv ant ageofpr o vi di nganobj ec t i v e t r ans f erpr i c enotbas edonar bi t r ar ymar kups .Mar k etpr i c eswi l l t her ef or ebe per c ei v edasbei ngf ai rt oeac hdi v i s i on,andwi l l al s oal l owi mpor t ant per f or manc ee v al uat i ont obec ar r i edoutb yc ompar i ngt heper f or manc eof eac hdi v i s i ont oout s i de,s t andal onebus i nes s es .Mor eac c ur at ei nv es t ment dec i s i onswi l l al s obemade. Thedi ffic ul t ywi t hf ul l c os t ,f ul l c os tpl us ,v ar i abl ec os tpl us ,andmar k etpr i c ei s t hatt heyal l r es ul ti nfi x edc os t sandpr ofi t sbei ngper c ei v edasmar gi nal c os t s
asgoodsar et r ans f er r edt oDi v i s i onB.Di v i s i onBt her ef or ehast hewr ong dat at oenabl ei tt omak egoodec onomi cdec i s i onsf ort hegr oup–ev eni fi t want edt o.I nf ac t ,onc ey ougetawa yf r om at r ans f erpr i c eequal t ot he v ar i abl ec os ti nt het r ans f er r i ngdi v i s i on,t her ei sal way st her i s kof dy s f unc t i onal dec i s i onsbei ngmadeunl es sanupperl i mi t–equal t ot henet mar gi nal r ev enuei nt her ec ei v i ngdi v i s i on–i sal s oi mpos ed.
VARI ATI ONSONVARI ABLECOST Ther ear et woappr oac hest ot r ans f erpr i c i ngwhi c ht r yt opr es er v et he ec onomi ci nf or mat i oni nher enti nv ar i abl ec os t swhi l eper mi t t i ngt he t r ans f er r i ngdi v i s i ont omak epr ofi t s ,andal l owi ngbet t erper f or manc e v a l u at i o n.Ho we v er ,bo t hme t ho dsa r es ome wha tc ompl i c at ed . nt hi sappr oac h,t r ans f er sar emadeat Var i abl ecostpl usl umpsum.I v ar i abl ec os t .Then,per i odi c al l y ,at r ans f eri smadebet weent het wodi v i s i ons ( Cr edi tDi v i s i onA,Debi tDi v i s i onB)t oac countf orfi xedc os t sandpr ofi t .I ti s ar guedt hatDi v i s i onBhast hec or r ec tc umul at i v ev ar i abl ec os tdat at omak e gooddec i s i ons ,y ett hel umps um t r ans f er sal l owt hedi v i s i onsul t i mat el yt obe t r eat edf ai r l ywi t hr es pec tt oper f or manc emeas ur ement .Thes i z eoft he per i odi ct r ans f erwoul dbel i nk edt ot hequant i t yorv al ueofgoodst r ans f er r ed. nt hi sappr oac h,Di v i s i onAt r ans f er soutatc os tpl usamar kup Dualpr i ci ng.I ( per hapsmar k etpr i c e) ,andDi v i s i onBt r ans f er si natv ar i abl ec os t .Ther ef or e, Di v i s i onAc anmak eamot i v at i ngpr ofi t ,whi l eDi v i s i onBhasgoodec onomi c dat aaboutc umul at i v egr oupv ar i abl ec os t s .Obv i ous l y ,t hedi v i s i onal c ur r ent ac c ou nt swon ’ ta gr ee ,an ds o mep er i od e nda dj u s t men t swi l l b enee dedt o r ec onc i l et hos eandt oel i mi nat efi ct i t i ousi nt er di v i s i onal pr ofi t s .
MARKETSFORTHEI NTERMEDI ATEPRODUCT mpl e1 Co ns i d erExa agai n,butt hi st i meas sumet hatt hei nt er medi at e pr oduc tc anbes ol dt o,orboughtf r om,amar k etatapr i c eofei t her$40or abl e4. $60.SeeT ( i )I nt e r medi at epr oductbought / sol df or$ 40 Di v i s i onAwoul dr at hert r ans f ert oDi v i s i onB,bec aus er ec ei v i ng$50i sbet t er t henr ec ei v i ng$40.Di v i s i onBwoul dr at herbuyi natt hec heaper$40,butt hat
wou l db eb adf ort hegr o upb ec au s et h er ei sno w amar gi n al c os tt ot hegr o up of$40i ns t eadofonl y$18,t hev ar i abl ec os tofpr oduc t i oni nDi v i s i onA.The t r ans f erpr i c emus t ,t her ef or e,c ompet ewi t ht heex t er nal s uppl ypr i c eand mus tbenohi ghert hant hat .I tmus tal s os t i l l benohi ghert hant henet mar gi nal r ev enueofDi v i s i onB( $90–$10=$80)i fDi v i s i onBi st oa voi d mak i ngnegat i v ec ont r i but i ons . ( i i )I nt er medi at epr oductbought / sol df or$60 Di v i s i onBwoul dr at herbuyf r om Di v i s i onA( $50beat s$60) ,butDi v i s i onA woul ds el l asmuc haspos si bl eout s i deat$60i npr ef er enc et ot r ans f er r i ngt o Di v i s i onBat$50.As s umi ngDi v i s i onAhadl i mi t edc apac i t yandal l out putwas s ol dt ot heout s i demar k et ,t hatwoul df or c eDi v i s i onBt obuyout s i deandt hi s i sno tgoodf ort hegr oupast her ei st henamar gi nal c os tof$60when obt ai ni ngt hei nt er medi at epr oduc t ,asoppos edt oi tbei ngmadei nDi v i s i onA f or$18onl y . Ther ef or e,wemus tenc our ageDi v i s i onAt os uppl yt oDi v i s i onB andwec andot hi sbys et t i ngat r ans f erpr i c et hati shi ghenought o c ompens at ef ort hel os tc ont r i but i ont hatDi v i s i onAc oul dha v emadeby s el l i ngout s i de.Ther ef or e,Di v i s i onAhast or ec ei v eenought oc ov ert he v ar i abl ec os tofpr oduc t i onpl ust hel os tc ont r i but i onc aus edbynots el l i ng out s i de: Mi n i mu mt r a ns f e rp r i c e=$ 18+( $ 60–$ 18 )=$ 60 Bas i c al l y ,t het r ans f erpr i c emus tbeasgoodast heout s i des el l i ngpr i c et oget Di v i s i onBt ot r ans f eri ns i det hegr oup. Thene wr ul esc ant her ef or ebes t at edasf ol l o ws :
ECONOMI CTRANSFERPRI CERULE Mi ni mum ( fi x edbyt r ans f er r i ngdi v i s i on) Tr ans f erpr i c e≥mar gi nal c os toft r ans f er outdi v i s i on+anyl os tc ont r i but i on And Max i mum ( fi x edbyr ec ei v i ngdi v i s i on) Tr ans f erpr i c e≤ t hel owerofnetmar gi nal r ev enueoft r ans f er i ndi v i s i onand t heex t er nal pur c has epr i c e
CONCLUSI ON Youmi ghthav et houghtt hatt r ans f erpr i c eswer emat t er sofl i t t l ei mpor t anc e: debi t si nonedi v i s i on,mat c hi ngc r edi t si nanot her ,butwi t hnoov er al l effec ton gr ouppr ofi t abi l i t y .Mat hemat i c al l yt hi smi ghtbet hec as e,butonl yatt hemos t el ement ar yl ev el .Tr ans f erpr i c esar ev i t al l yi mpor t antwhenmot i v at i on, dec i s i o nmak i n g,p er f or man cemeas ur e men t ,a ndi n v es t me ntd ec i s i o nsar e t ak eni nt oac c ount–andt hes ear et hef ac t or swhi c hs oof t ens epar at e
s uc c es s f ul f r om uns uc c es s f ul bus i nes s es . KenGa r r e t ti saf r ee l ancewr i t erandl ect ur e r
