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Goliath Transfer Pricing Case. An Instructional Case by Charles Bailey & Denton Collins. Objectives and Features. Illustrates the issues associated with setting a firm’s transfer pricing policies.

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goliath transfer pricing case

Goliath Transfer Pricing Case

An Instructional Case

by

Charles Bailey & Denton Collins

objectives and features
Objectives and Features
  • Illustrates the issues associated with setting a firm’s transfer pricing policies.
  • Given that there is a best decision for Goliath as a whole in each negotiation, the case is useful in illustrating how policy choice can lead to good or bad insourcing/outsourcing decisions.
  • Overview:
    • Students to assume the roles of top management and divisional management in negotiating transfer prices.
    • The simulation requires first that the student playing the role of CEO select a transfer pricing policy from four possible mechanisms: market-based, cost-based, negotiated, and “dual” pricing.
    • Following the CEO’s policy decision, the divisional managers decide whether to deal internally or externally based on their respective negotiation.
    • Classroom discussion examines the process and outcomes
procedures
Procedures
  • Assign “companies” (groups of 4 students) and pass out materials:
    • 1 CEO, 3 divisional-manager roles
  • CEO sets TP policy [subject to constraint that we must use all policies in the exercise]—then receives full package to see the decisions divisional managers face.
  • Divisional managers negotiate for their needs according to instructions.
  • Meanwhile, CEO considers what the divisional managers should do for the overall welfare of Goliath.
    • CEO observes but does not interfere. Be prepared to discuss the merits of division managers’ actual decisions.
procedures continued
Procedures, continued
  • Tabulate the results of negotiations.
  • Give everyone full package, discuss results.
    • Were the results in the best interest of of Goliath as a whole?
    • Look at theoretical effects of the methods on managers’ decisions
possible tp schemes in the case
Possible TP Schemes in the Case

In keeping with maximum autonomy, you [the CEO] allow divisions to accept or reject any offer to buy or sell to another division. However, whenever an internal transaction does occur, the price must follow guidelines that you set. Here are the options you are considering.

  • Market-based: actual competitive prices that the buyer would have to pay outsiders, less 2% to adjust for the economies of dealing internally (less sales effort, no bad debts, etc.).
  • Cost-based: actual full manufacturing cost.
  • Negotiated: whatever price the two parties can agree on.
  • Dual:
    • The selling division receives 120% of its full manufacturing costs.
    • The buying division pays 98% × (the market price they would pay outsiders).
should top management w ant the transactions are they good for goliath
Should Top Management Want the Transactions?(Are they good for Goliath?)

Transaction 1: Plastics sells cases to Metals

  • Out-of-pocket costs:
  • Inside:
  • (5000 cases)(28+17+34)=$395,000
  • Outside:
    • (5000 cases)($115) =$575,000
  • Yes!
should top management w ant the transactions are they good for goliath1
Should Top Management Want the Transactions?(Are they good for Goliath?)

Transaction 2:Electronics sells sensors to Plastics

  • Inside:
  • Out-of pocket costs: 2000 x $43 = 86,000

+ opportunity costs:2000 (80-43)=74,000

Total $160,000 (NOTE: =2000*$80)

  • Outside:
  • 2000 x $75 = $150,000
  • No! Better off outside.
should top management w ant the transactions are they good for goliath2
Should Top Management Want the Transactions?(Are they good for Goliath?)

Transaction 3: Metals sells brackets to Electronics

  • Out-of-pocket costs:
    • Inside:
    • 8000 x $49 =$392,000
    • Outside:8000 x $40 =$320,000
  • No!
see handout for theoretical effects
See Handout* for Theoretical Effects
  • Is optimal outcome in this case likely with...
  • Market?
  • Cost-based
  • Negotiated?

*See Overview of Incentives and Predicted Outcomes