Intra-Company Pricing

In order to achieve the benefits of decentralization, many companies have split their operations into divisions that act as more or less autonomous “profit centers.” These profit centers typically are allowed, within certain limits, to make their own price and output decisions. Their executives, furthermore, are judged on the basis of the divisional profits achieved.

Suppose a commodity or service is to be exchanged between two profit centers of a single company. The firm may produce copper metal in one profit center and fabricate it into copper wire in a separate profit center. Or production may take place within one profit center and marketing of the company’s product within another. The question then arises of how to price the internal transaction of, for example, supplying copper metal to the coppoer wire division. The supplying division will of course be interested in having the intermediate product valued at a high price, the receiving division at a low price.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit, Line of Sight