PerformanceEvaluationChapters16and17ArthurAnderson.ppt

Performance EvaluationChapters 16 and 17Arthur Anderson LLP
Let’s Play a Pricing Game
Please use Groups of 2-3 students
½ of the class will be manufactures
A monopoly wholesaler sells to the monopoly retailer in its territory
½ of the class will be retailers
A retailer buys from the only supplier in its territory
A retailer sells to the consumers in its territory
Please be sure to pick up a handout before class
Retail Demand Curve
Retail Price
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Units Sold
0
1
2
3
4
5
6
7
8
9
10
11
12
The role of divisional evaluation anizational architecture
Divisional performance evaluation should help, not hinder, the firm’s ability to maximize value given the division’s decision rights
. bad/good transfer pricing decisions
Transfer Pricing Basics
Transfer pricing = valuation of intermediate goods and services within the firm
Also called "charge-back system“
Transfer price – internal price at which an intermediate good or service is exchanged between divisions
One division “pays” the supplying division for the intermediate good or service.
Funds are thus transferred from the paying division’s budget to the supplying division’s budget.
Anecdotes about Transfer Pricing
“Divisions in my firm are always fighting over transfer prices. As a CEO, I am not very concerned about this issue. Transfer prices simply affect the division of firm profits among subunits within the firm. I am interested in total firm profits.”
- Anonymous CEO
“Bellcore is the research arm of AT&T. In the late 1980s highly talented and well paid engineers and scientists were discovered to be typing their own letters, memos and research papers and using typists outside pany, risking the security of munications. Meanwhile the typing pool that was supposed to do this work was laying people off because there was not enough for them to do.”
- E. Kovac and H. Troy, 1989, Harvard Business Review, Sept. – Oct.
Transfer pricing results
D