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Organizational Structure:
Vcu is a French company that produces cars, lorries, buses and
agricultural machinery. Vcu organization is composed of various independent
divisions in which each division is further divided into business units. The three
divisions are MA, MB, and MC division. Kamp Motors of Roosendonk, is a
business unit and profit center within MA division in Netherlands that has more
than 2,300 employees. The organization structure of Vcu is as follows:
Vecu
Parent
Company
MA
MB
MC
Division
Division
Division
Kamp
Motors
Business
Unit
consumption,
power-full
and
noiseless).
Produced
Type1
Engine
(Conventional type, supply to business outside the Vcu concern) and Type 2, 3
and 4 Engine (high-tech and supplied internally).
Accounts
Amount
Sales
361
External costs*
204
Staff cost
98
Depreciations
20
*External cost: Costs of raw materials and auxiliary materials, purchased components,
contracted work, etc.
Assignments
As consultant for the Board of Vcu try to make a report by answering the 4
questions as follows:
Question 1
What transfer price should Kamp insist on, in your opinion, if it were to supply the
type 2a engine to the MB division now and in the future? Please give arguments
for your proposal.
You should at least consider the principle minimum transfer price = variable
cost per unit + opportunity costs for the supplier and the Vcus transfer
pricing policy.
Please draw attention to the interests of Kamp Motors as well as those of Vcu
as a whole.
Taking into consideration Vcus transfer price policy, what do you think of Guy
Merciers attitude?
E
E
E
E
Answer 1
The case scenario that is expected by Question 1:
Kamp will receive the request for supplying MB division and prepare the proposal
of the price by considering the companys policy and the principle of minimum
transfer price. Based on the information from the case description, as follow the
case flow as expected by Question 1:
2
MB
division
want to
buy from
Kamp,
Guy
Mercier's
attitude?
Type 2a
Engine.
To be
installed in
MB 99
(new car
model).
Give the
specificatio
n of the
engine.
Assume
that they
paid high
to Kamp in
the
previous
transaction
s.
2 external
suppliers
sent
offering,
the price
was not
opened by
Guy
Mercier.
Send
request/sp
ecification
expected
to Kamp.
Kamp
consider
the
request
from MB
division
Capability
to meet
the
Technical
specificatio
n
requireme
nt as per
request.
Demand
expected
to rise
steeply in
the coming
year.
Threat
from
external
supplier
(competito
r).
Production
is still
under
capacity.
Support
the
company
objectives
as a whole.
Decide to
receive
Price
Proposal?
Considered
Transfer
Pricing
Method:
At least
consider
Minimum
transfer price
principle.
Vecus transfer
price policy:
Cost plus Mark
up.
Market-based
transfer pricing.
Negotiated
pricing.
Here are some probabilities the transfer pricing based on some difference
method:
A. Using the principle of minimum transfer as consideration in this
assignment, the transfer price would be: 2,500 + 750 = 3,250. We use
750 as the opportunity cost as it is it cost for not selling to external party,
while Kamp still has unused capacity. We use 2,500, the variable cost
per engine in the calculation, not 4,000 as the full cost, as it is an internal
selling that should be net of irrelevant cost such as development cost. This
computation of priceis easier and the lowest price Kamp can offer. I think
there is no need of bargaining in this process that could spend much
energy and time. The transfer pricing of 3,250 is still below the lowest
3
price (3,750) the assumed competitors lowest price could offer to the MB
division.
B. In this case, it has mentioned that Vcu implements transfer pricing policy:
Cost plus Mark-up, but unfortunately there is no information in the case
that explain how much the company can put additional mark up when they
conduct transfer pricing, so this methodology cannot be implemented in
Question 1.
C. Due to limited information in the case, market-based transfer pricing also
cannot be used without additional information. Ideally the market-based
transfer pricing is used in perfectly competitive market that requires
homogeneous product, open information, and no individual buyer or
sellers can affect the price.
D. Kamp can use transfer price that have been calculated in point A (principle
of minimum transfer price) amounting to 3,250 and price information that
have been already got by MB division from the Black and FER as starting
point to use negotiated pricing method. If we assume that the price that
was offered by the Black and FER is 3,750 (the lowest estimation), Kamp
can get higher price if the proposal price is at least just below the
competitors, assumed of 3,600 (just assumption). At this price, Kamp can
get higher profit with better price while the MB division still can get benefit
as to the transfer pricing is below the price that is offered by external party.
The goal objective of Vcu group could be achieved with this method, but
could spend much energy and time in the bargaining process.
Guy Merciers attitude, as described in this case, is that he only focus on his
(division) objective without care and interest to other managers, divisions, and
business units of Vecu as a whole. The impact of this to the organization is
categorized as competitive organization based on his character. This
organization has multidivisional structure and profit contribution as a key word in
performance evaluation. The situation could be worst in this case due to the
management process, including its cost information system/transfer pricing
method. In Vcu, the use of Top-down approach, not as the competitive
organizations concept that used bottom-up approach could lead to the unfairness
4
Question 2
E
3 Cost Information System. Current Model:
E BCPU = External Cost + Staff and Administration Cost
E
E Notes:
1. At 90% of maximum production capacity.
2. External cost: Cost of raw materials and auxiliary materials, purchased
components, contracted work, etc.
3. BCPU: The Basic Cost per Unit.
Possibility to reorganize the Cost Information System Based on the BCPU.
The Board
of Kamp
want to
increase
profit and
Assignme
nt:
1.Propose
the new
cost
New Cost
Information
System of
Kamp &
New
How Vecu's
5
board and
MB division
ensure that
Kamp is not
n.
system.
g data on
2.
unit cost?
Recommendations
for reorganization.
The following table simulation
present to Board of Kamp of how the Board of
improve
their
perfomance
appraisal
New cost
By
By
Unit Cost
reorganizatio
Structure
n cost
information
system of
External engine
Cost:Type
2, 3 , and 4.
developed
from BCPU
(the basic
Existing Cost
cost per
unit).
System
Cost of raw
material and
auxiliary
materials
XXX
XXX
Purchased
component
XXX
XXX
Salary for
administration
staff
XXX
Depreciation
XXX
Total Cost:
XXX+XXX+XXX+XX
XXX+XXX+XXX-XX+XXXX-XX
Staff &
Depreciation
Cost:
X
Table 1. Concrete Example to indicate How the Board of Kamp Can
Manipulate the Unit Cost Based on the BCPU
Based on the BCPU, we found that the components of the cost information
system unit can be identified, analyzed and reorganized. The implication of the
cost reorganization as illustrated in the table above, Kamp will have lower
production cost than before that is expected to boost the selling of the product.
The production cost per unit also will decrease if Kamp get approval to sell their
products to external party with full capacity production.
Reorganizing Its Organization
There are 2 main things that mentioned in the case:
The reorganization of its organization as explained in fact will reduce the cost,
but it could harm the companys strategy as a whole (Vcu). It will be explained
in more detail in Question and Answer 4.
Data Manipulation.
There are some alternative ways for the Board of Vcu and MB division to
ensure that Kamp do not manipulate data on unit cost:
1. Comparison between unit cost of product selling by Kamp with the offering
from external party (other company). If the gap of the unit cost of Kamps
product is significant, it could be a signal that there is something wrong
with the unit cost of Kamps product.
2. Assign an internal auditor to audit the cost information system frequently
to ensure the accuracy and reliability of the system as well as the data.
Question 3
Within the Vcu concern, Kamp is obliged to supply engines at cost per unit plus
a mark-up for profit. Please compare Vcus transfer price system with Vcus
system of responsibility centers and with Eccless theory on transfer pricing.
Answer
3
Vecus Transfer
Pricing System Improvement?
The case scenario that is expected by Question 3: Compare the Vcus transfer
price system with Eccless theory on transfer pricing. Based on the comparison,
consultant expected can give recommendations for improvement. Based on the
information from the case description, the case flow as expected by Question 3:
Vertical Integration
Fairness in Transfer
Pricing
Transfer Pricing
Based on Eccless
Theory
VS
Vcus transfer
pricing system
many papers and books written by Eccles regarding to the transfer pricing topics,
two (2) of the most famous publications are Control With Fairness in Transfer
Pricing and The Transfer Pricing Problem: A Theory for Practice that were
published in 1985 and 1983 respectively. Most of the discussion that I will be
presented in this assignment refers to these publications.
The main conclusions that can be inferred from the studies that were conducted
by Eccles that no best transfer pricing method exist. The methods implemented
varied and any particular method to be chosen probably was based on the
primary objective of the company. Whats the company trying to accomplish
through transfer pricing process. Eccles emphasized that vertical integration is
the most important reason for establishing transfer-pricing policies. Vertical
integration means unification of different activities of the business within the
boundaries of a single firm to achieve economics of production and securing
supply or demand.
As impact of the conclusion that was explained before, for understanding the
transfer pricing method that most suitable with the specific company, Eccles
developed organization characteristic models that are summarized (concluded) in
the table below:
Characteristic of
Organization:
Competitive
Cooperative
Collaborative
Strategy:
Aggregate of
division's
strategies
Total company
strategy
Mutually defined
total company
business
perspectives
Structure:
Functional
Multidivisional
Functional Matrix
Multidivisional
Functional Matrix
Systems:
Profits, ROI
compared with
budget, internally
and externally
Costs compares
with budgets and
history
Combination of
costs, profit, and
ROI compared
with budget
Processes:
Bottom-up;
distributive
bargaining
Top-down;
integrative
bargaining
Vertical
Integration
Level:
Low
Very Strong
Strong
Performance
evaluation base:
Depend on the
result of the
business unit
itself
The company
performance as a
whole
Top
management
control:
Through systems
of outcomes
Through structure
on actions
Through
processes
balancing
structure and
systems
Most proper
Transfer Pricing
Method:
Market-based
Market-Based/
Negotiated
To understand the relation between Vcus transfer pricing system and Eccless
Theory, we need to explain the organization characteristic of Vcu based on the
10
Competitive
Strategy:
Structure:
Multidivisional
Systems:
Processes:
Low
Performance evaluation
base:
Top management control:
Most proper Transfer Pricing
Method:
that
transfer-pricing
system
implemented
can
promote
goal
12
13
Diffrentiation Strategy.
Ordain
14
R & D Department is
run internally.
Confidentiality of
the company's
products and
technology
invention.
Responsiveness and
strong integration
between company's
strategy and
innovation programs.
Disadvantages
other divisions.
What are the risks/negative impacts that would happen if the Board of
Kamp implements the idea of collaborating with technical universities?
o The risks/negative impacts would be:
Vcu
implements
Differentiation
Strategy,
specifically
Product
16
II.
III.
IV.
a whole.
It is not in line with the characteristic of organization that is more
closer with competitive organization.
2.
The idea (or action) of the Board of Kamp to reorganize its organization by
changing the R & D Departments is not proper.
3.
The Board of Kamp can manipulate the current cost information system to
reduce product cost, while the Board of Vcu can trace and detect manipulation
of data on unit cost by its auditing divisions and business unit.
17
Recommendations
1. To achieve the companys objective as a whole, the transfer pricing system of
the Vcu need to be improved by:
a. Retaining the current transfer pricing system. But, to ensure the
congruence of the objective and actions of each division and
business unit to achieve the companys objective as a whole and
the fairness of performance evaluation of its divisions, business unit
and manager, the company need to change the transfer pricing
policy formulation process from top-down to be bottom-up
approach. The company also must change the transfer pricing
method from cost-based to be market-based.
b. Using the Eclless theory, as alternative of the recommendation
No.1, to ensure the congruence of the objective and actions of each
division and business unit to achieve the companys objective as a
whole and the fairness of performance evaluation of its divisions,
business unit and manager, the company needs to change its
category of its organization from the competitive organization to be
collaborative organization.
c. Cancelling the idea to reorganize its organization by changing the R
& D Department, as it is based on the narrow and short-term
interest that could harm the companys objective as a whole.
2. To reduce unit cost of product, the Board of Kamp can use BCPU as a base
to evaluate the cost of items to avoid or reallocate to other post through
proper accounting techniques without fraud actions.
3. To ensure that no manipulation on the data of unit cost which would violate
the companys policy or categorized as fraud actions that can be traced and
detected by the Board of Vcu. The Board needs to conduct cost analysis
and assign auditor for conducting audit regularly on the cost information
system so that any violation can be traced and detected properly and timely.
18