Transfer Pricing Options: There are three general methods for establishing transfer prices.

1. Market-based transfer price: In the presence of competitive and stable external markets for the transferred product, many firms use the external market price as the transfer price. 2. Cost-based transfer price: The transfer price is based on the production cost of the upstream division. A cost-based transfer price requires that the following criteria be specified: a. Actual cost or budgeted (standard) cost. b. Full cost or variable cost. c. The amount of markup, if any, to allow the upstream division to earn a profit on the transferred product. 3. Negotiated transfer price: Senior management does not specify the transfer price. Rather, divisional managers negotiate a mutually-agreeable price.

Each of these three transfer pricing methods has advantages and disadvantages.

Market-based Transfer Prices: Microeconomic theory shows that when divisional managers strive to maximize divisional profits, a market-based transfer price aligns their incentives with owners incentives of maximizing overall corporate profits. The transfer will occur when it is in the best interests of shareholders, and the transfer will be refused by at least one divisional manager when shareholders would prefer for the transfer not to occur. The upstream division is generally indifferent between receiving the market price from an external customer and receiving the same price from an internal customer. Consequently, the determining factor is whether the downstream division is willing to pay the market price. If the downstream division is willing to do so, the implication is that the downstream division can generate incremental profits for the company by purchasing the product from the upstream division and either reselling it or using the product in its own production process. On the other hand, if the downstream division is unwilling to pay the market price, the implication is that corporate profits are maximized when the upstream division sells the product on the external market, even if this leaves the downstream division idle. Sometimes, there are cost savings on internal transfers compared with external sales. These savings might arise, for example, because the upstream division can avoid a customer credit check and collection efforts, and the downstream division might avoid inspection procedures in the receiving department. Market-based transfer pricing continues to align managerial incentives with corporate goals, even in the presence of these cost savings, if

appropriate adjustments are made to the transfer price (i.e., the market-based transfer price should be reduced by these cost savings).

However, many intermediate products do not have readily-available market prices. Examples are shown in the table above: a pharmaceutical company with a drug under patent protection (an effective monopoly); and an appliance company that makes component parts in the Parts Division and transfers those parts to its assembly divisions. Obviously, if there is no market price, a market-based transfer price cannot be used. A disadvantage of a market-based transfer price is that the prices for some commodities can fluctuate widely and quickly. Companies sometimes attempt to protect divisional managers from these large unpredictable price changes.

Cost-based Transfer Prices: Cost-based transfer prices can also align managerial incentives with corporate goals, if various factors are properly considered, including the outside market opportunities for both divisions, and possible capacity constraints of the upstream division.
First consider the case in which the upstream division sells the intermediate product to external customers as well as to the downstream division. In this situation, capacity constraints are crucial. If the upstream division has excess capacity, a cost-based transfer price using the variable cost of production will align incentives, because the upstream division is indifferent about the transfer, and the downstream division will fully incorporate the companys incremental cost of making the intermediate product in its production and marketing decisions. However, senior management might want to allow the upstream division to mark up the transfer price a little above variable cost, to provide that division positive incentives to engage in the transfer. If the upstream division has a capacity constraint, transfers to the downstream division displace external sales. In this case, in order to align incentives, the opportunity cost of these lost sales must be passed on to the downstream division, which is accomplished by setting the transfer price equal to the upstream divisions ext ernal market sales price. Next consider the case in which there is no external market for the upstream division. If the upstream division is to be treated as a profit center, it must be allowed the opportunity to recover its full cost of production plus a reasonable profit. If the downstream division is charged the full cost of production, incentives are aligned

because the downstream division will refuse the transfer under only two circumstances: - First, if the downstream division can source the intermediate product for a lower cost elsewhere; - Second, if the downstream division cannot generate a reasonable profit on the sale of the final product when it pays the upstream divisions full cost of production for the intermediate product. If the downstream division can source the intermediate product for a lower cost elsewhere, to the extent the upstream divisions full cost of production reflects its future long-run average cost, the company should consider eliminating the upstream division. If the downstream division cannot generate a reasonable profit on the sale of the final product when it pays the upstream divisions full cost of production for the intermediate product, the optimal corporate decision might be to close the upstream division and stop production and sale of the final product. However, if either the upstream division or the downstream division manufactures and markets multiple products, the analysis becomes more complex. Also, if the downstream division can source the intermediate product from an external supplier for a price greater than the upstream divisions full cost, but less than full cost plus a reasonable profit margin for the upstream division, suboptimal decisions could result.

Negotiated Transfer Prices: Negotiated transfer pricing has the advantage of emulating a free market in which divisional managers buy and sell from each other in a manner that simulates arms length transactions. However, there is no reason to assume that the outcome of these transfer price negotiations will serve the best interests of the company or shareholders. The transfer price could depend on which divisional manager is the better poker player, rather than whether the transfer results in profit-maximizing production and sourcing decisions. Also, if divisional managers fail to reach an agreement on price, even though the transfer is in the best interests of the company, senior management might decide to impose a transfer price. However, senior managements imposition of a transfer price defeats the motivation for using a negotiated transfer price in the first place.

What is the definition of regular price?

Answer:
The regular price of an item is the non-sale price of that item.

What Is Transfer Pricing?

A transfer price is the price at which one company buys and sells goods or services or shares resources with a related affiliate in its supply chain. Aggressive transfer prices may inflate profits in low-tax jurisdictions and depress profits in high-tax countries. Thus, transfer pricing is the system of laws and practices used by countries to ensure that goods, services and intellectual property transferred between related companies are appropriately priced, based on market conditions, such that profits are correctly reflected in each jurisdiction. Transfer pricing rules generally provide companies with the flexibility to set the conditions surrounding intercompany transactions. Planning allows taxpayers to optimize the allocation of income within the group. At the same time, noncompliance with transfer pricing rules can be costly for multinationals. Noncompliance can result in extended disputes with tax authorities, including litigation. It can also lead to double taxation, interest on tax underpayment and penalties.

Cultural Imperatives, Electives and Exclusives

Posted on March 14, 2012 Doing international business requires adaptation. No company will be successful if it tries to go international without adapting. Some American companies get angry about adaptation. Why do we have to be the ones to adapt? Why cant they adapt to us? The truth is, most companies operating globally speak English, so they are already doing more than their fair share to adapt to us. No one is asking you to renounce your American culture completely take on the culture of the company you are doing business with, but make sure you know what customs you need to adhere to and what to abstain from.

There are three groups of business customs that you should be aware of: cultural imperatives, cultural electives, and cultural exclusives. Cultural imperatives are customs that you must conform to if you want to be successful. An example of a cultural imperative is relationship building. In many Asian countries such as China and Japan and Latin American countries, business understand the importance of building a relationship. Businesspeople do not do business with companies, they do business with people. If you want to do business in these countries, it is a cultural imperative to spend time building that relationship before you even bring up business. Never underestimate the importance of building trust with your business partners. It will make or break a deal. Another cultural imperative for Asian countries is that you cant cause someone to lose face. Never raise your voice or correct someone in public. If you arent aware of these cultural imperatives you will fail on your business venture.

Cultural electives are customs that you may conform to, but you dont have to. There are many things in different cultures that can make you feel uncomfortable. Be aware of what the cultural customs are so you wont be surprised and you know how to politely decline. In the Czech Republic, liqueur is offered at the start of business meetings, even if it is 8 in the morning. It is to build friendship and trust, so politely accept and take a ceremonial sip. Arabs will offer coffee as a way to signal friendship, so you should also accept it even if you dont intend to drink it. Most customs fall into the cultural elective category.

Cultural exclusives are customs that are only for locals. You will break a deal if you try to partake in these customs. If you are a Christian, dont go to the Middle East and attempt to act like a Muslim because that is insulting their religion. Similarly, never joke about a countrys politics or criticize their customs. Just like here, you can joke about your own family, but if someone else does youll want to fight them. Be careful with cultural exclusives.

Have you encountered any problems with cultural imperatives, electives or exclusives while doing business abroad?

What are the Types of pricing strategies?

Answer: Cost plus pricing The most common way for businesses to decide on a price. Add up the cost of the raw materials and labour that have gone into making the product to determine its cost. Then add on an element of profit over and above the cost mark up Competitor based pricing Firms have to charge similar prices to other firms. This happens when there is lots of choice and not much product differentiation e.g. petrol, CDs Promotional pricing Sales Special offers Final reductions Buy one get one free! Used to increase sales in the short term, in order to clear space for new lines, undercut a rival or clear stock that is no longer in demand. Penetration pricing Setting an initial low price - to get consumer interested. When this low price is below cost it is called loss leading. Once established the price will increase. Example - collectors magazines Price discrimination Charging different prices to different consumers for the same product. Example is rail/bus travel for students and OAPs Skimming Opposite to penetration pricing Firms charge a high price to begin with which helps to make the product desirable. Once established firm will lower the price. Example - digital TV, MP3 players

Five Challenges For Tomorrow's Global Marketing Leaders: Study

CMOs are struggling to adapt to a world that has fundamentally changed over the course of their careers. Disruptive digital technologies and the new expectations of the global consumer are forcing global firms to adjust and innovate.

SapientNitro has made a significant effort to understand how these changes are impacting large global organizations. What we found was surprising: Just 15% of senior marketers feel prepared to deal with the rapidly changing consumer, and just 8% believe agencies are succeeding in their support of global brands. Our CMO Global Marketing Readiness Study, a six-month research study of 114 CMO-level marketers, identified five significant challenges that should act as a wake-up call to global marketers: 1. Disruptive technologies. The proliferation of new technologies from social media and mobile apps to in-store digital experiences and mobile payments represents a set of obstacles for which senior marketers are ill prepared. Just 20% consider themselves very knowledgeable about technology, yet by 2017 these CMOs will purchase more technology than their CIOs, according to Gartner. The scale of these investments must be at a global level within the organization, yet be mindful of local market requirements. The challenge points to a need for a technology-savvy global CMO with a sensitivity for local-global relationships and the flexibility to adapt to and embrace disruptive technologies and social media-driven, personalized marketing. 2. Globally connected consumers. A new class of consumers, adept with and empowered by affordable ubiquitous technology, has changed the marketing rules. Our research shows that 82% of senior marketers feel that interconnected consumers have broken down the barriers between global and local marketing. Global marketings core challenge has been to deliver relevant messages to the local market, but in an age where assets

designed for one country are rapidly shared around the world, the challenge is to give global consumers a delicate balance of local, regional and global campaigns simultaneously. 3. Localization revisited. Coping with the diversity of global consumers that also have strong regional subcultures is regarded as a challenge by 75% of senior marketers. A recent Millward Brown study found that of ads that tested exceptionally well in one country, just over one in 10 did equally well in another country raising real questions about the cost efficiencies of cross-border campaigns. Add to this the growing tensions between local and global roles and authority within the organization challenging for 82% of senior marketers and what becomes clear is the need for organizational design and digital platforms that allow for a multi-channel, multi-disciplinary mindset across the organization. 4. Multi-channel misses. A full 37% of senior marketers dont believe that their marketing activities are fully integrated across digital and traditional channels. The opportunity to grow revenues from multi-channel consumers requires investments in digital experiences that are too large for a single market, but which must provide flexibility for localization. The bottom line is that senior marketers need to adopt the global mindset that will let them displace strong organizational silos, specialized partners and a reliance on traditional single-channel campaigns in order to realize the benefits of cross-channel experiences. 5. Organizational structures. Too often, the three executive branches of CMO, CEO and CTO claim an overlapping interest in the area of digital experience, leading to a failure to organize efficiently for the new global marketing environment. Our research shows that 56% of marketers agree coordination between digital and traditional marketing teams is more challenging than five years ago silos and a lack of coordination are getting worse just as the need for collaboration is becoming greater. These trends leave us to believe in the rise of a new breed of marketer with a global marketing mindset. This new global CMO should build strategies that cross silos and approaches and combine the characteristics of a traditional marketer with the skills traditionally associated with a CTO and even with the recently created CXO offices. A decade ago the ecommerce or digital function would have reported to the CIO, but today were seeing about 50% report to the CMO the single largest bucket of C-level oversight for digital. Mastering this evolved global marketing mindset could be what defines the most successful brands of the next decade. But having a global mindset isnt just for global brands; as businesses look to export their success into other markets, brands must increasingly defend against new global competition.

INTERNATIONAL INFORMATION SYSTEMS (IIS),

founded in 1989 & head-quartered in the Kingdom of Bahrain is an ISO 9001:2000 Certified Company.

IIS is the parent company of a group of FOUR information technology companies. This diversified group of Four Companies offers, total solutions in Fiber Optics Consulting, design, supply, installation, implementation, project management, support & distribution services. IIS and its group companies are located in Bahrain, Qatar & Saudi Arabia. IIS and its group companies, over the years, have built up expertise and skills unmatched in range and quality by any other information technology company in Bahrain. As a provider of Information Technology services for over Seventeen years, INTERNATIONAL INFORMATION SYSTEMS (IIS) with our experienced technical team makes it possible for us to offer our services throughout the Gulf & Middle East regions.