Background:
National Youth Association is a company responsible for holding conferences. In addition, the company is engaged in publishing magazines and books. The main services of the company include arranging conferences, providing housing facility and production of cattle and poultry. The major division of the company includes Conference, Housing and Production. Some of the competitors for the housing division include Magnolia Hotels and Golden Eagle Hotels.
Problems and Issues:
The managers of the two divisions have to negotiate on the prices offered by the divisions. The primary concern faced by the company was the conflicts between the divisions on setting higher prices than the external suppliers. Managers of all the departments have submitted the issue to the senior management in order to find a possible solution. The company was not much involved in holding the conferences, therefore; much of the sales were coming from the outside suppliers. The manager of the conference division found housing division to be very discrepant with them in terms of pricing. The market was competitive and it was difficult for the conference division to receive the bid which was 10% higher than the market rate.
Transfer pricing can be defined as the price charged by one division to another within the company. If the transfer prices are higher, then it may be beneficial for one division of the company but not for the other division. The basic reason behind transfer pricing is to make profits for the company as a whole, rather than for one division. Moreover, the business is highly decentralized and managers have the autonomy to set the prices thus; they are seeking for the divisional profits. The manager of the conference division will receive the lowest bid because it will help the business to earn more profit margins. Further, Mr. Kenton should accept this bid as it is the lowest bid by the outside suppliers.
Recommendations:
In order to reduce the issues highlighted above, the management of the business should first decrease the level of decentralization among the managers of each department as the managers were given extra freedom and empowerment that in turn resulted in the battle to increase the profit margins for their own respective department. Further, the market was competitive as the Magnolia Hotels were bidding less than their own division, therefore; opportunity....................................
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One question the separation of prices for services provided by other entities, which are higher than the rates obtained from external contractors. This issue is presented to senior management for decision making. "Hide
by Robert N. Anthony Source: Harvard Business School 2 pages. Publication Date: July 8, 1993. Prod. #: 193152-PDF-ENG
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