A multiple price approach to limiting intra-group transfer pricing negotiations

Luther, Robert; Zverovich, Svetlana

Abstract

Various approaches to solving the well-known transfer pricing problem are known. However, none satisfactorily resolve the objective of allowing both divisions to earn a profit in such a way that sub-optimal output levels are avoided. Tomkins (1990) combines a single cost-plus transfer price with a pragmatic process of negotiation. That model is excellent when the source division’s target contribution is ‘small’. However, its practical value is limited if the target contribution is ‘close’ to 50%, because a disproportionate level of negotiation is required. In certain circumstances a high level of negotiation may be costly, contrary to the organisational culture, or strategic imperatives. In this paper, Tomkins’ model is developed by introducing multiple transfer prices. By using just a few transfer prices, it is possible to guarantee that the proportion of group contribution over which negotiation is required does not exceed 1%, thereby reducing the risk of managers taking advantage of unequal power.

• Journal Article Type: Article
• Publication Date: Sep 30, 2010
• Publicly Available Date: Jun 8, 2019
• Journal: International Journal of Management Accounting
• Print ISSN: 2163-3843
• Publisher: Nova Science Publishers
• Peer Reviewed: Peer Reviewed
• Volume: 3
• Issue: 2
• Keywords: transfer pricing, negotiation, Tomkins’ model, Samuels’ model
• Public URL: https://uwe-repository.worktribe.com/output/974823
• Publisher URL: https://www.novapublishers.com/catalog/product_info.php?products_id=48675