Greeting Transfer Price
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Greetings lnc.: Transfer Pricing Issues
Developed by Thomas L. Zeller, Loyola University Chicago, and Paul D. Kimmel, U niv ersity of Wis consin-Milw aukee
THE BUSINESS SITUATION
Two years ago, prior to a major capital-budgeting decision (see Case 4), Robert Burns, the president of Greetings Inc., faced a challenging transfer pricing issue.
He knew that Greetings store managers had heard about the ABC study (see Case 2) and that they knew a price increase for framed items would soon be on the way. In an effort to dissuade him from increasing the transfer price for framed prints, several store managers e-mailed him with detailed analyses showing how framed-print sales had given stores a strong competitive position and had increased revenues and profits. The store managers mentioned, howeve4, that while they were opposed to an increase in the cost of frarned prints, they were looking forward to a price decrease for unframed prints. Management at Wall Décor was very interested in changing the transfer pricing strategy. You had reported to them that setting the transfer price based on the
product costs calculated by using traditional overhead allocation measures had been a major contributing factor to its non-optimal performance. Here is a brief recap of what happened during your presentation to Mr. Burns and the Wall Décor managers. Mr. Burns smiÌed during your presentation and graciously acknowledged your excellent activity-based costing (ABC) study and analysis. He even nodded with approval as you offered the following suggestions. 1. Wall Décor should decrease the transfer price for high-volume, simple print items. 2. Wall Décor should increase the transfer price for low-volume, complex framed print items. 3. Your analysis points to a transfer price that maintains the 20o/o marktsp over cost. 4. Adoption of these changes will provide Wall Décor with an llo/o relurn on investment (ROI), beating the required l0o/o expected by Greetings'board
a
Greetings lnc.: Transfer Pricing Issues
Developed by Thomas L. Zeller, Loyola University Chicago, and Paul D. Kimmel, U niv ersity of Wis consin-Milw aukee
THE BUSINESS SITUATION
Two years ago, prior to a major capital-budgeting decision (see Case 4), Robert Burns, the president of Greetings Inc., faced a challenging transfer pricing issue.
He knew that Greetings store managers had heard about the ABC study (see Case 2) and that they knew a price increase for framed items would soon be on the way. In an effort to dissuade him from increasing the transfer price for framed prints, several store managers e-mailed him with detailed analyses showing how framed-print sales had given stores a strong competitive position and had increased revenues and profits. The store managers mentioned, howeve4, that while they were opposed to an increase in the cost of frarned prints, they were looking forward to a price decrease for unframed prints. Management at Wall Décor was very interested in changing the transfer pricing strategy. You had reported to them that setting the transfer price based on the
product costs calculated by using traditional overhead allocation measures had been a major contributing factor to its non-optimal performance. Here is a brief recap of what happened during your presentation to Mr. Burns and the Wall Décor managers. Mr. Burns smiÌed during your presentation and graciously acknowledged your excellent activity-based costing (ABC) study and analysis. He even nodded with approval as you offered the following suggestions. 1. Wall Décor should decrease the transfer price for high-volume, simple print items. 2. Wall Décor should increase the transfer price for low-volume, complex framed print items. 3. Your analysis points to a transfer price that maintains the 20o/o marktsp over cost. 4. Adoption of these changes will provide Wall Décor with an llo/o relurn on investment (ROI), beating the required l0o/o expected by Greetings'board