A multiple price approach to limiting intra-group transfer pricing negotiations

Luther, R. and Zverovich, S. (2010) A multiple price approach to limiting intra-group transfer pricing negotiations. International Journal of Management Accounting, 3 (2). ISSN 2163-3843

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Abstract

Various approaches to solving the well-known transfer pricing problem are known. However, none satisfactorily resolve the objective of allowing both divisions to earn a profit in such a way that sub-optimal output levels are avoided. Tomkins (1990) combines a single cost-plus transfer price with a pragmatic process of negotiation. That model is excellent when the source division’s target contribution is ‘small’. However, its practical value is limited if the target contribution is ‘close’ to 50%, because a disproportionate level of negotiation is required. In certain circumstances a high level of negotiation may be costly, contrary to the organisational culture, or strategic imperatives. In this paper, Tomkins’ model is developed by introducing multiple transfer prices. By using just a few transfer prices, it is possible to guarantee that the proportion of group contribution over which negotiation is required does not exceed 1%, thereby reducing the risk of managers taking advantage of unequal power.

Item Type:Article
Uncontrolled Keywords:transfer pricing, negotiation, Tomkins’ model, Samuels’ model
Faculty/Department:Faculty of Business and Law > Department of Accounting, Economics and Finance
ID Code:12964
Deposited By: Professor R. Luther
Deposited On:24 Nov 2010 11:38
Last Modified:12 Jul 2014 14:39

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