Better Life Products (BLP), Inc., is a large U.S.-based manufacturer of health-care products; it specializes in cushions,
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Foreign divisions' shipments to the United States are subject to customs duties according to the U.S. Tariff Code, which adds to BLP's cost of the foreign-based manufacturing. However, the code requires U.S. companies to pay duty on only the value added in foreign countries. For example, a product imported from an Argentine company to BLP pays customs on only the amount of the product's cost resulting from labor incurred in Argentina. To illustrate, a product with $10 of materials shipped from the United States to Argentina that incurs $10 of labor costs in Argentina is charged a tariff based on the $10 of labor costs, not the $20 of total product cost. Thus, for tariff purposes, having as small a portion of total product cost from the foreign country as possible is advantageous to BLP.
BLP division managers, including those of the foreign manufacturing facilities, are evaluated on the basis of profit. Jorge Martinez is the manager of the manufacturing plant in Argentina; his compensation from BLP is based on meeting profit targets.
BLP uses a transfer-pricing approach common in the industry to allow each of the company's divisions to determine the transfer pricing autonomously through interdivision negotiations. In recent years, however, top management has played an increased role in such negotiations. In particular, when the divisions determine a transfer price that can lead to increased taxes, foreign exchange exposure, or tariffs, the corporate financial function becomes involved. This has meant that the transfer prices charged by foreign divisions to U.S. sales divisions have fallen to reduce the value added by the foreign country and thereby reduce the tariffs. To avoid problems with U.S. and Argentine government agencies, the transfer prices have been reduced slowly over time.
One effect of this transfer-pricing strategy has been the continued decline of the foreign divisions' profitability. Jorge and others have difficulty meeting their profit targets and personal compensation goals because of the continually declining transfer prices.
Required
1. Assess BLP's manufacturing and marketing strategies. Are they consistent with each other and with what you consider to be the firm's overall business strategy?
2. Assess BLP's performance-measurement system. What changes would you suggest and why?
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Related Book For
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins
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