transfer price Question — OpenTuition Forums

Ssuresh32015y ago

Hi, I have this question and was trying to work it out, but need some urgent help..

A training company has two training centres.
Each training centres has its own staff to client organization, and charges a fixed rate for each training day. Trainers are either full time or hired externally. External staff are hired when demand exceeds.

The London centre is very busy and charges $2000 per trainer day.It pays external staff $1200 per day..VC to use its own full time trainers is $200 per day.

The Other training centre is Liverpool .The manager want the London centre use their trainer instead of external. They need to agree to a daily fee for London centre to pay Liverpool.

Estimate is that Trainers sent frm Liverpool will incur $200 as VC and $250 for traveling and accommodation per day. These cost will be paided by Liverpool centre.

Required, Identify the optimal charge per day to use Liverpool trainers in the following circumstances
a) assuming that Liverpool has spare consulting capacity.
b) assuming that Liverpool training centre is fully occupied charging clients $750 per trainer day...

thanks..

Former user15y ago#1

Hello Suresh,

In both scenarios, the starting place is 'Marginal Cost + Opportunity Cost' (the formula from the books). This means Variable cost + Lost contribution.

Variable cost for Liverpool (Li) is $450 (200+250). Li doesn't have lost contribution as they have spare capacity.

So a possible transfer price is $450. But this is not fair--London (Lo) saves $750 (1200-450) and will be highly motivated to get this price. Li doesn't gain any extra contribution, so might not be bothered to send their consultant to London. Li's profit won't increase (Li won't get any additional contribution).

A better transfer price is $825:

Li is motivated, he gets $375 additional contribution (825-450)
Lo is motivated, he saves $375 (1200 - 825).

This price is FAIR.

SCENARIO TWO

Using the same exact logic as above, you find a fair transfer price is $1100*:

Li is motivated by additional $100 (1100-1000)
Lo is motivated by saving $100 (1200-1000)

And it's fair--they both improve their results by the same amount.

*assuming that Li incurs the variable cost AND the travel costs when they send their guy to London, assuming no travel costs when their guy stays in Li.

NNiven15y ago#2

steve...u need to send policemen to search for me because iam lost here...where did u get the 825? I do understand the concept but imediately u mentioned 825...i got lost,help please

Former user15y ago#3

The highest that Lo would pay is 1200. Any price higher and Li would go outside the group to the freelancer.

The lowest that Li would accept is 450. Any lower and he is making a loss.

In between 450 and 1200 is 825. This is exactly 375 higher than the minimum, and exactly 375 lower than the max.

(1200-450 = 750....then.....750/2 = 375)

Ssue88815y ago#4

Hi Steve,

Full time trainers are paid 200 by Li as well. I assume they have permanent contact. That means if they are not asked to give trainings.They will still get paid.
If li has spare capacity. The relevant cost for Li will be 250 ( incremental, training).

not sure.

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