Transfer pricing analysis
Transfer pricing analysis
Northwestern established some guidelines that determine the prices for transfers. Based on the instructions the transfers are to be found on the resale price approach. In this respect, the company set its average sale prices in respect to unrelated entities. The company gets most of its subsidiaries supplying pulp from the United States. Therefore the policy guidelines set to affect the market and the company’s subsidiaries. Based on these guidelines the prices at the current US market were set at $450/TON.
In addition to the pricing of a local subsidiary, the company also set several guidelines that could guide sales from other foreign subsidiaries. The firm set some cap on the amount of pulp that each of the subsidiaries could acquire in sale within a given year from the company in the US. The firm also evaluated the financial performance of each of the firms through the focus on the manufacture and the sales of the pulp allotment. The allocation did not include transfers of funds to the subsidiary, but instead, book entry was carried out at the corporate office. The focus of the listing was to analyze each subsidiary performance. The income of the mill was calculated by subtracting the shipment costs and freight charges from sales prices.
In the year 1994, the company’s average shipping prices were at $450/ ton and also attracted a direct cost of 280/ton that eventually led to profits of $170/ton. In this cost, there were also the freight costs. The guidelines had a lot of impact on the shipments that were made to South Korea. The company had to look at several other bids but preferred to go with the South Korean bid. By looking at the profit margins, it emerges that sales from the South Korean company incurred a wastage costs of about $33. However, the firm made a profit of about $192. The effect of these policies that the firm set was that it limited the number of profits that the firm could make. In the transactions, there was wastage of about ten percent of the charge. Also, there was a $100/ton in other direct conversion costs. From the analysis thus, it seems that there was a lot of expenditure that the company was incurring especially on the aspect of the transportation and the wastages. There is a need that the firm needs to focus on cutting down on this other expenditure. Such an approach would aid in increasing the profits margins that the company can make from individual sales. The aspect of the choice of the suppliers is also the issue that would have an impact on the profit margin. The company policy was to take a supplier that had previously done business with the company based on the view that they could supply more quality. However, the approach might seem to lock out other firms that could also provide the same quality but at lower prices. While the company’s focus might be on the cost, there is also need to take into account the other factors such as the profit margins that the company seeks to get (Olsson, 2018).
Consequences for international sales
From the view of the companies engagement at the international level, it seems that the policy helps the company to make profits and its competitiveness at the international level. Most of the firms would prefer to work with the company in getting pulp since they are sure that they would get quality products. Besides, with a set price the other subsidiary have an easy time knowing the requirements of the firm and the profits that they would make dealing with the firm. Although the approach that focuses on quality might at times be less profiting to the firm, it has the advantage of making it more competitive at the international level. However, the firm needs to focus on the aspect of profit as it moves into the future.
Besides, the company’s policy that gives clear guidelines on how the subsidiary should work helps to create a sense of balance and motivation for the efficiency. With set guidelines, the focus of the subsidiary is to deliver on end rather than focusing on developing their policies. This approach thus seems to be much more profiting for the firm and its subsidiaries (Barrett et al. 2000)
Firms might take several approaches to ensure that they stay competitive and make more profits. Some of the methods might be aimed at streamlining the activities of the firm both locally and internationally while others might be directed towards profitably. The approach that Northwestern has taken has had several impacts on the firms out. First, they help in ensuring that there is quality in the delivery of services while also increasing the profit margins. The approaches have also contributed to improving the firm’s competitiveness at the international arena. The reasons for such are that the firm has a keen focus on its subsidiary to submit products that meet the set guidelines. This should be the focus than any other firm might opt to focus on.
Barrett, M. E., & Slape, M. W. (2000). Northwestern paper company. Thunderbird International Business Review, 42(5), 597-602.
Olsson, L. (2018). The Northwestern Knitting Company—Makers of Munising Wear. In Women’s Work and Politics in WWI America (pp. 43-81). Palgrave Macmillan, Cham.
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