1. Transfer prices set by Headquarters: List three reasons why might it be a bad idea to corporate headquarters set transfer prices.
Transfer price is the monetary value of goods or services leaving from one department to another within a company (Froeb, 2014). So if headquarters set transfer prices:
Headquarters can be misled with the wrong data related to cost by the selling subsidiary in order to show more profit.
The headquarters might be influenced by the buying subsidiary to make decisions in their favor and ask sellers to reduce the transfer price.
Headquarters want to increase the profit at any cost; though arbitrarily but the transfer price set by headquarters may have an effect on the decisions made and the reported performance.
2. Your local fast food chain with two dozen stores uses the company's internal corporate marketed department to produce signage, print ads, in-store displays, and so forth. When placing an order, store managers are assessed a chargeback (transfer price) that reduces store profitability but increases marketing department profitability. Lately, store managers have been ordering more and more marketing services; the marketing department is swamped, and it cannot afford to hire more staff. What does this indicate about the chargeback rates?
In the above case, as we can see that marketing department is gaining at the cost of the store. Due to the chargeback rates store's profitability is decreased while marketing department's profitability is increased. However, stores managers require more and more marketing services making the marketing department flooded with work. This means that proper allocation of cost has not been made in each department making it difficult for the marketing department to hire the staff. So if the proper allocation of cost is done in the marketing department and the transfer price is increased, it will be helpful for the marketing department to hire the staff.
3. Loyalty payments: Intel made large loyalty payments to Hewlett Packard(HP) in exchange for HP buying most of their chip from Intel instead of rival AMD. AMD sued Intel under anti-trust laws, and Intel settled the case by paying $1.25 billion to AMD. What incentive conflict was being controlled by these loyalty payments? What advice did Intel ignore when they adopted this practice? Why?
Anti-trust laws or competition laws are laws to protect consumers from predatory business practices which ensure that fair competition subsists in an open-market economy. In this case, by providing a loyalty settlement, Intel tries to capture the whole share of Hp, not letting AMD enter the market and enjoy the monopoly right (Froeb, 2014).
In this whole process, Intel forgot that The Monopolistic and Restrictive Trade Practices Act (MRTP) which ensures that power doesn't go in the hand of few and prohibits monopolistic and restrictive trade practices, are more strict and if AMD had sued Intel under MRTP instead of anti-trust laws the scenario could be worse and just the settlement wouldn't have been worked in that case.
References
Froeb, L. M. (2014). Managerial Economics: A problem solving approach. Mason, OH: Cengage Learning, Inc.
