Transfer pricing has the main role of offering motivations for upfront investment and promoting intercompany transfer. When transfer prices are predetermined via negotiation, divisional executives will have inadequate investment motivations as a result of “hold-up” challenges while cost-based transfer method can evade such “hold-up” challenges. Transfer pricing will affect managers’ decisions to promote intercompany transfers of an intermediary product and to establish incentives for Reading divisional managers to develop relationship-specific investments (Chung 2010).
The transfer pricing will impact more on Reading’s managers and affect their attitudes towards intercompany business. When the corporate managers have the capacity to determine whether to sell or purchase on either external or internal market environment, the transfer price aspect in management’s decision to ascertain if Readings’ managers incentives are in line with the entire company and its stakeholders. The main aim of the transfer price is goal congruence, which Reading’s managers will need to transfer products when maximizing consolidated proceeds (Baldenius 2008.
The entire idea of price transfer for Reading will not be accepted by all the managers when the price transfer involving the corporations is not a profit-optimizing strategy for the firm. This means that the company’s managers are the major decision-makers on issues to do with transfer prices. Therefore, the price transfer for the intercompany will affect the decisions of the divisional managers on whether to adopt the strategy or not. The Reading managers’ decisions will be anchored on whether the price transfer strategy will maximize the profits for the company (Harris 2008).
When large corporations such as Reading transfer their products across global borders, transfer prices plays a major role in the circulation of the income taxes within the companies. The transfer price strategy for intercompany will be viewed by Reading as key resource to the company’s performance since it will be significant with regulatory aspects within its business environment and also in international trade. This means that the managers will embrace the price transfer strategy as it will increase business across boundary and be able to meet the various regulations imposed by various governments (Baldenius 2008.
Furthermore, Reading managers view the price transfer strategy as an effective tool to calculate its potential profits and make some management changes to boost its profits in the future. This happens when the commodity is transferred between investment or profit centers in a decentralized company, whereby this will allow calculation of profits. The calculated profits can be used by the Reading managers in performance assessment of the company thus laying down the needed policies. In addition, the transfer price strategy can be beneficial in taxation purposes, which can be used by Readings’ managers (Harris 2008).
Question b
Negotiation transfer prices between Millwall and Reading companies is an effective and satisfactory method to deal with the issue of transfer price. Negotiated transfer pricing has a benefit of imitating free market in which the divisional managers from the two firms sell and buy products and services from each other in a way that will create arm-strong business transactions. In most …