Question

Identify a multinational corporation (MNC); its corporate home office may be in any country, as long as you are able to post a link to an annual report in your initial post to the discussion.

MNC of Choice: Coca-Cola

1) Discuss the benefits and potential problems that the three methods of transfer pricing (negotiated prices, market prices, and full cost plus profit margin would present to the MNC you have chosen.

2) Discuss specifically the role of minimization of tax burden, maximization of whole company profit, and minimization of customs duties plays out for the MNC you selected, and the host countries they produce parts or develop services in.

Answer 1

Negotiated based transfer pricing

Benefits: managers are given autonomy to decide whether to purchase or sell from its sister unit or source them from or to external market.

Potential problems: This method requires sufficient external information to be available regarding the external market price, terms of trade etc. Internal cost information must also be shared in order to negotiated a reasonable price.

Market based transfer price

Benefits: 1. since demand and supply determine market prices, hence it likely to be unbiased

2. This is less ambigious to compared cost based pricing, they cannot be manipulated

3. since pricing is a competitive, divisional performance can be linked more objectively to

the company's overall profits.

Potential problems: 1. these cannot be completely unbiased, if competitive market dosen't exist.

2. It is not suitable when market prices fluctuate widely or quickly.

3. Goods that are transferred may be at intermediate stages in the production

process, market prices may not be available for such goods.

Cost plus profit margin based transfer pricing

Benefits: 1. Since the supplying division makes a profit, and supplying division does not record any

profit on these sale.

Potential Problems: 1. Since the transfer price under this method closely approximates its market price

, the purchase division may bear a share of selling expenses altough none was

incurred for such internal sales. therefore it could distort the performance of

purchasing division. hence it becomes important to adjust transfer price.