Transfer Pricing Disputes
Current
Profit Inc./Dec
Costs
Costs
Division A
Internal @ $1,000
3,000,000
2,000,000
1,800,000
Total Costs
3,900,000
3,800,000
Division B
Internal @ $2,000
2,000,000
1,000,000
External @ $1,900
1,900,000
2,850,000
Total Costs
3,900,000
3,850,000
Inc 50,000
Division C
Part 101 @ $1,000
3,000,000
2,000,000
Part 201 @ $2,000
2,000,000
Total Sales
2,100,000
1,400,000
Part 201 @ $1,200
1,200,000
Total Costs
3,300,000
2,000,000
Profit
1,700,000
Company as a whole (100,000 + 50,000) -- 700,000 = 550,000 loss
To enforce the proposed plan would cause a $550,000 loss for the company as a whole. The increases in profits for division A and B, $100,000 and $50,000 respectively, are not enough to cover the $700,000 loss from division C. This is especially if the selling prices of the finished products of division A and B. are the same as the company would take the loss as a whole. If division C. dropped their prices to market prices, they would still experience a $400,000 loss, still creating a $250,000 loss for the company.
Where there are no other customers likely to...
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