Centre And Then Compare Their Efficiency Essay -- Variable cost, Costs,

ï‚ § Market based transfer pricing – In this case Country A charges Country B according to the market price. Therefore, the manager’s performance is comparable as both have opportunity to make profit. ï‚ § Negotiated Transfer Pricing – Here the prices are negotiated, keeping profit margin for each of them. In this case they are also comparable. ï‚ § Full cost transfer pricing – In this case, the suppliers do not keep profit for their division, instead full cost is transferred to another department and the final profit is made by the last department. Thus, the profit centres are not comparable to each other. ï‚ § International transfer pricing – Since we know they trade among each other across borders also, they also need to be aware of taxation rates, currency rates, transportation costs and local suppliers in different countries in order to set prices. Here, each portfolio cannot be compared based on profit margins. c) Improves efficiency and speed of decision making: As the profit centre managers have authority to decide on their suppliers, customers, selling prices, etc, they have the opportunity to perform tasks at a faster pace and increased efficiency. d) No risk of reduced profitability: Revenue centre managers are only responsible for generating sales, and they do it at the cost of reduced profitability, but profit centre managers generate revenue making sure profits are earned. 6.2 Now let us discuss the Drawbacks of the profit centre managers: a) Unable to make capital investments: Profit centre managers are not authorized to make investment decisions; resulting in loosing opportunity to make profitable investment in specif... ... middle of paper ... ... 20 Unit variable cost of buying 7 15 20 24 (4) 1 3 4 Annual requirements (units) 3000 4000 5000 6000 So, Extra Variable Cost of Buying (12000) 4000 15000 24000 Fixed Cost of Buying 1000 2000 3000 4000 Extra total cost of buying (13000) 2000 12000 20000 Assuming that fixed cost will remain constant whether or not the company buys or makes the products, the relevant cost of manufacture will be considered the variable cost. In this circumstance, the company should only buy products if the