Team Exercise

1
Team Exercise

• Transfer price A transfer price is what one part
  of a company charges another part of the company
  for a good or service.

2

• You are organized into teams of two, and each
  team is matched with two other teams (to form
  super teams of six).
• Choose a team leader. The team leader is
  responsible for picking up, distributing,
  collecting, and returning the index cards and
  also for handing in the one-page write-up at the
  end of class. (A great honor indeed leadership
  has its rewards)

3

• The index cards consist of FOUR separate
  scenarios. Each scenario is printed on a
  different color index card green, red, yellow
  and blue.
• The team leader should hand out the red cards to
  one team, the yellow cards to another team, and
  retain the green and blue cards for his/her own
  team.

4

• Each scenario is played one at a time, starting
  with scenario 1 (green), and proceeding through
  scenario 4.
• To play each scenario, do the following The team
  with the cards for that scenario should retain
  the card that says top management, give the
  buyer card to one team, and the seller card
  to the other team. Every team should get to play
  buyer and seller at least once.

5

• The buyer team and seller team first talk among
  themselves to devise a strategy for the
  negotiations. Each division wants a favorable
  transfer price, to maximize divisional profits.
• Then the buyer team and seller team negotiate a
  transfer price.
• Top management has all of the information from
  both sides. It is your job to intervene in the
  negotiations only if it becomes clear that the
  two divisions are not going to reach an
  agreement. In this event, you should terminate
  the negotiations and move on to the next
  scenario.

6

• Top management also must record the outcome on
  the one-page summary that will be handed in at
  the end of class.
• REMEMBER
• Play one scenario at a time finish it, and go on
  to the next scenario.
• Top management should not share information with
  either division either before or during
  negotiations.
• Before negotiations, each team must determine
  privately its strategy for negotiating. No
  eaves-dropping by the other division.
• Every team gets to be the buyer at least once.

7
Scenario 1 (Green)
Seller Capacity
150,000 units Demand
120,000 units External Price
14.00 Regular Variable Cost
9.00 Cost savings on
internal order 1.00 Buyer Requirements
12,000 units Market
price 14.00
8
Scenario 1 (Green)
Seller Excess capacity?
YES Will be willing to accept a transfer as low
as 8.00 (regular variable cost of 9 less
savings of 1) Buyer Will be willing to pay up
to 14, but no more, since you can buy externally
for 14.
9
Scenario 2 (Red)
Seller Capacity
150,000 units Demand
150,000 units External Price
15.00 Regular Variable Cost
9.00 Cost savings on
internal order 2.00 Buyer Requirements
12,000 units Market
price 14.00
10
Scenario 2 (Red)
Seller Excess capacity?
NO Opportunity cost lost contribution margin on
each external sale 15.00 - 9.00 6.00 To make
at least 6.00 contribution margin on an internal
sale, the transfer price must be at least (9 -
2) 6 13. Buyer Will be willing to pay up
to 14, but no more, since you can buy externally
for 14.
11
Scenario 3 (Yellow)
Seller Capacity
150,000 units Demand
150,000 units External Price
15.00 Regular Variable Cost
9.00 Cost savings on
internal order none Buyer Requirements
12,000 units Market
price 14.00
12
Scenario 3 (Yellow)
Seller Excess capacity?
NO Opportunity cost lost contribution margin on
each external sale 15.00 - 9.00 6.00 To make
at least 6.00 contribution margin on an internal
sale, the transfer price must be at least 9.00
6.00 15.00. Buyer Will be willing to pay up
to 14, but no more, since you can buy externally
for 14.
13
Scenario 4 (Blue)
Seller Capacity
150,000 units Current Sales
120,000 units externally at
14 12,000 units internally at
13 Regular Variable Cost
9.00 (no cost savings on the internal
orders) Buyer You have received an offer to sell
additional product at 20. Variable cost is the
cost of the intermediate component plus 9.
14
Scenario 4 (Blue)
Seller Excess Capacity
YES Variable cost is 9. You should be willing
to accept a transfer price as low as
9. Buyer You are willing to pay up to 11 for
the inter-mediate product for these additional
sales 20 selling price less 9 additional mfg
cost 11.
15

• Please turn in the cards, sorted and
  paper-clipped as they were handed out (Scenario 1
  on top, then 2, 3 and 4 within each scenario,
  top management on top, then buyer, then seller.
• Please turn in the one page write-up.