Finance and Accounting

Comment on each of the post below:
Post #1
You made some great points in your post and I found it interesting that you said “this tactic may fail to conform to today’s economic environment since it discourages efficiency in the supply division in manufacturing practices.” The cost-based method allows a company to grow by “reducing income and corporate taxes in high tax countries by overpricing goods that are transferred to countries with lower tax rates help companies obtain higher profit margins” (cfi.com, n.d.). I cannot help but feel like this is appropriate and has merit with the economy and issues our country is dealing with currently. What are your thoughts?

Post #2
One possible tactic that companies will use is the Market-based transfer price. “The transfer price charged a related party is either based on the price that would be charged to an unrelated customer or determined by reference to sales of similar products or services by other companies to unrelated parties. Market-based systems avoid transferring the inefficiencies of one division or subsidiary to others, which is a problem associated with cost-based systems. They help ensure divisional autonomy and provide a good basis for evaluating subsidiary performance. However, market-based pricing systems also have problems. The efficient working of a market-based system depends on the existence of competitive markets and dependable market quotations. For certain items, such as unfinished products, there may not be any buyers outside the organization and hence no external market price” (Doupnik, Finn, Gotti, and Perera, 371).

I think that this tactic has merit in today’s environment and market because the economies have been changing and the only way to keep accurate financials is to go with the market rate. I have heard recently about transfer pricing as more frequently than when I started my career in the late 1990s. In a Fortune 500 survey completed in 1990, “companies in the United States found that 41 percent of respondent companies relied on cost-based methods in determining international transfer prices, 46 percent used market-based methods, and 13 percent allowed transfer prices to be determined through negotiation” (Doupnik, Finn, Gotti, and Perera, 372). “Management accounting theory suggests that different pricing methods are appropriate in different situations. Market-based transfer prices lead to optimal decisions when (1) the market for the product is perfectly competitive, (2) interdependencies between the related parties are minimal, and (3) there is no advantage or disadvantage to buying and selling the product internally rather than externally.5 Prices based on full cost can approximate market-based prices when the determination of market price is not feasible. Prices that have been negotiated by buyer and seller rather than being mandated by upper management have the advantage of allowing the related parties to maintain their decentralized authority” (Doupnik, Finn, Gotti, and Perera, 372).

Post #3
Transfer pricing is a tactic used to allocate profits to countries that have lower taxes. In this way, the corporation owes less tax and generates higher profits. There are three methods companies commonly use in an international context:

The cost-based transfer price – Based on the total cost of producing a product or service. Producing a profit margin for the seller, the cost-based system is usually quite simple to use.
The market-based transfer price – Based on the market price to sell to customer or based on related company sales prices by others in the industry.
The negotiated transfer price – The result of buyer and seller negotiations which could also be related to cost or market transfer price.
A company may use the cost-based tactic to transfer and reduce costs. Let us consider a U.S. candle making company that produces candles at a cost of $.90 per candle. Their Canadian counterpart prices the candles at 10.00 each and spends .10 per candle for marketing, advertising, and distribution. The total profit would amount to $9.00 per candle. The U.S. company would then charge a transfer price between $1.00 and $9.00 per candle to lower taxes in countries that reflect more profit for the company. So if the Canadian tax rates are lower than the U.S,, the company would more than likely transfer a higher price to the Canadian subsidiary for the candles.

Due to the current economic environment, I do feel this tactic has merit because companies need to be able to stay afloat. By lowering their tax burdens using the cost-based tactic, the U.S. candle company may be able to grow and eventually become a franchise creating more jobs for the American citizens and a stronger economy. By “reducing income and corporate taxes in high tax countries by overpricing goods that are transferred to countries with lower tax rates help companies obtain higher profit margins” (cfi.com, n.d.).