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LINKING PERFORMANCE TO MARKETS - Coggle Diagram
LINKING PERFORMANCE TO MARKETS
TRANSFER PRICES: MANAGING
MARKET INSIDE THE FIRM
Transfer price
an internally set transaction price to account for the transfer
of goods or services between divisions of the same firm
Used to
value and coordinate the work flows of interdependent organization units that are each held accountable for financial performance
TRANSFER PRICING
ALTERNANTIVES
Transfer prices
using market data
possible only when
an active market exists for similar goods and services
internal transfer prices based on comparable external market prices can be easily established
Advantages
simple
objective, and seen as valid by managers in all divisions
prices based on market data allow accurate performance evaluation and minimize the potential for misallocation of resources based on faulty performance measures
provides managers with the sense that they are running their own business
Disadvantages
for most intermediate goods and services transferred within a firm, market prices are typically not available
Transfer prices using
internal cost data
Variable cost
include materials, labor, and other direct costs of production
Full Cost
Full Cost Plus Profit
Negotiated Prices
Activity-Based Transfer Prices
TRANSFER PRICING
EFFECTS AND TRADE-OFF
Division Managers Want
Transfer Prices to
represent fairly the financial performance of their division
reflect the impact of good business decisions within their division
require downstream division managers to include the full costs associated with the products they are receiving
Financial Staffs Want
Transfer Prices That
simple and credible
easy to use and easy to explain
Corporate Managers Want
Transfer Prices to
encourage division managers to make decisions that maximize the long-run profitability of the overall firm
provide information
LINKING PROFIT PERFORMANCE TO EXTERNAL MARKETS
Corporate Performance from
Perspective of Customer Markets
value proposition
measures
Financial measures
Gross Profit Margin
Revenue, or Revenue Growth
Warranty Expenses/Product Returns
Nonfinancial measures
Customer Satisfaction
Referrals
Market Share/Market Share Growth
Corporate Performance from
Perspective of Financial Markets
Financial Value Measures
Return on Investment (ROI)
Residual Income
Profit
Market Value
ECONOMIC VALUE ADDED
Adjustments to Eliminate the
Distortions of Accrual Accounting
Deferred Tax Expense
LIFO Inventory
Amortization of Goodwill
Research and Development Expense
Adjustments to Calculate
the Cost of Capital
LINKING EXTERNAL MARKETS
AND INTERNAL OPERATIONS:
BACK TO THE PROFIT PLAN
types of strategic decisions
Gross Margin
Selling, General, and Administrative Expenses
Cost of Goods Sold
Profit
Revenue