Question

Why wouldn't the traditional transfer approaches work at TEVA?

Answer 1

The traditional transfer pricing approaches will not work at TEVA because of the fact that the initial system that was proposed was based on marginal costs which were defined to be just material costs. Direct labor would not be included in the transfer price.

Secondly the system led to inequities for the marketing and operations divisions. The inequities were both real as well as perceived. Transfer pricing system was not promoting efficiency and this was accentuated by the fact that each constituency wanted a different system and a system that will optimally reflect their operations and needs.

As such the traditional transfer pricing approaches like market price, full price, marginal price and negotiated price will not work for TEVA. Market price will not work as no market existed for TEVA’s products that have not been distributed to customers. Full price method had an inherent flaw and it did not capture actual price structure in TEVA’s plants. Marginal price system was inadequate and negotiated price led to endless arguments between managers of different divisions.