What Are Negotiated Transfer Prices?
Negotiated transfer prices are essentially the financial terms of peace treaties between different departments within the same company. When there is no open market to dictate the value of goods and services exchanged internally, these divisions must come together, shake hands (or sometimes, metaphorically, swords) and agree on prices for the intra-company trade.
The Art of Applying Negotiated Transfer Prices
The process starts somewhat like a medieval trade negotiation—each division acting as its own fiefdom, armed with its own perceptions of value and power. The goal? To haggle their way to a price that won’t start a corporate civil war. Typically, in the absence of a fair external market to set the standard, these inter-division negotiations can be the linchpin for ensuring that each division feels they’re getting a fair share of the royal treasury.
Conflict Resolution: Role of a Mediator
At times, the power disparity or the high stakes involved could turn negotiations into a stalemate. Here’s where a mediator—perhaps a corporate equivalent to a wise old sage—can step in. Their role is to guide these feuding divisions toward a truce, ensuring both sides find terms they can salute without feeling conquered.
Benefits and Drawbacks
Benefits:
- Autonomy: Divisions get a say in their financial destinies, making them stakeholders in the success of the negotiation.
- Tailored Pricing: Allows for flexibility and adjustments based on specific division needs and capabilities.
- Reduced Conflict: With successful negotiations, there is less likelihood of internal squabbles over resources allocation.
Drawbacks:
- Time Consuming: More time around the negotiation table means less time spent on conquests (market expansions).
- Complexity: Keeping track of internal prices can be as hard as deciphering ancient scrolls.
- Bias and Power Plays: Divisions with more corporate power could tilt the scales in their favor, turning negotiations into a tyrant’s feast.
Examples in Action
Imagine a tech company where the hardware division supplies parts to the software division. Without a fixed external price, they sit down to determine how many gold coins—or dollars—the software division should pay for the hardware. They negotiate based on production costs, expected profits, and perhaps whether the software division had the best holiday party last year.
Further Readings
To expand your knowledge on negotiated transfer prices, and to perhaps avoid initiating a corporate Game of Thrones, consider these enlightening texts:
- “Transfer Pricing and Corporate Taxation: Problems, Practical Implications and Proposed Solutions” by Elizabeth King
- “Transfer Pricing Handbook: Guidance for the OECD Regulations” by Robert Feinschreiber
Related Terms
- Transfer Pricing: The big umbrella that covers pricing mechanisms within a company.
- Cost-Based Transfer Pricing: Prices set based solely on the costs incurred by the supplying division.
- Market-Based Transfer Pricing: Pricing based on what external parties would charge under similar circumstances.
- Centralized Pricing Strategy: When the overlords (senior management) dictate prices without involving the divisions themselves.
In the grand scheme of things, negotiated transfer prices aren’t just about figures—they are about fostering a corporate culture where divisions do not engage in battles but in mutualistic barters. Thus, knowing the art of negotiated transfer prices can essentially be knowing the art of maintaining peace within one’s corporate kingdom.
