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. To be published in Operations Research Letters. ISSN 0167-6377 [Submitted]
Publisher's URL: http://www.sciencedirect.com/science/journal/01676...
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.
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