Question: ICB has four manufacturing divisions each producing a particular type

ICB has four manufacturing divisions, each producing a particular type of cosmetic or beauty aid. These products are then transferred to five marketing divisions, each covering a particular geo-graphic region. Manufacturing and marketing divisions are free to negotiate among themselves the transfer prices for products transferred internally. The manufacturing division that produces all the hair care products wants a particular hair conditioner it developed and produces for Asian markets priced at full cost plus a 5 percent profit markup, which amounts to $ 105 per case.
The South American marketing division believes it can sell this conditioner in South America after redesigning the labels. However, most South American currencies have weakened against the dollar, putting further pressure on the prices of U. S.– produced products. The South American marketing division estimates it can make money on the hair conditioner only if it can buy it from manufacturing at $ 85 per case.
Manufacturing claims that it cannot make a profit at $ 85 per case. Moreover, the other ICB marketing divisions that are paying around $ 105 per case will likely want to renegotiate the $ 105 transfer price if South America marketing buys it for $ 85.
You work for the corporate controller of ICB, Intl. She has asked you to write a short, nontechnical memo to her that spells out the key points she should consider in her upcoming meeting with the two division heads regarding transfer pricing. You are not being asked to recommend a particular transfer price, but rather to list the important issues the controller should be aware of for the meeting.

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  • CreatedDecember 15, 2014
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