Lecture 6

Question 1

What is centralisation?

Answer 1

Head office controls most of decisions

Question 2

What is transfer pricing?

E.g
Team a makes a steel for 10
They sell it to team b for 12
Team b use builds a car that cost them 4 more pounds
They sell car for 20
- what is company total profit?

Answer 2

• sell something to the same compnay. The price they choose is called transfer price.

Team a= make 2 profit
Team b =12+4=16
20-16= 4
Total = 6 profits

Question 3

Why do companies do this? 2 reasons

Answer 3

1. To see how good each team is
2. To pay less tax ( pretending to sell)

Question 4

What are the 3 ways they decide price in transfer pricing?

Answer 4

1. Market price = use the real price in the outside world for e.g something cost 20 then they know team a can charge team b the price
2. Cost - based price = use the cost of making the time and add a little extra 20%
   E.g it cost to make something 15 then add 20% tax ( £3 ) total price would 18
3. Negotiated price = team a and team b talk and agree on price