Intercorporate Investment
Categories: Company Management
We’re always on the lookout for good investment opportunities, so when our eye is caught by C-It 4U, Inc., a small fortune-telling business in Atlantic City, we convince the board of directors at our own firm (Destiny Calls, LLC) that we need to invest in that little company ASAP. They’re going places, and we want to cash in on their success.
When one organization invests in another like this, it’s called, not surprisingly, “intercorporate investment.”
The C-It 4U-Destiny Calls scenario is referred to as a minority investment—we’re not buying all that many shares—but there are other ways intercorporate investment can happen. We could take over a company’s debts in return for future financial returns, or we could buy so much of their stock that our organization becomes a major stakeholder and/or has a controlling interest. We could even negotiate a private deal with C-It 4U, where we purchase maybe just a little slice of the corporation. Whatever form it takes, these are all versions of intercorporate investment.
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Cost Accounting: How Does Transfer Prici...2 Views
And finance Allah Shmoop How does transfer pricing work Oh
all right You work at the multinational multi divisional conglomerate
Global Mega Giga Tek Co You had the purchasing team
at Fragrance to the bed It's the firm's perfumed diaper
division for babies who really like to be you know
pampered your product combines perfume Fragrance is with specialty diapers
for that upper class baby ready for a night out
pretends like Coco not caca and Low Do not quite
ready for du toilette To create the product you buy
diapers from one source and perfume from another source Then
your team of highly trained spritz ologists applies the perfume
to the diapers Luckily global Mega Giga Techo has a
diaper division and a perfume division or a maybe unluckily
for you life just got more complicated because of transfer
pricing Well the company bigwigs air happy that everything stays
in house You can get all your raw materials from
within the global mega family and that's great But it's
also a headache Why Well because if you bought diapers
from one vendor you'd have a market price for them
You'd negotiate hard and pick the best deal for your
company from the eighteen purveyors of fine nappies for the
spirited pre millennial set Same deal with the perfume but
here that's not the case because you're essentially buying from
well yourself And that's a problem because the prices now
aren't quote market unquote They're kind of made up sorta
Yes you can get in the zone of a market
price but often there really isn't a kind of market
clearing price for a million nappies like nobody else buys
them in that kind of bulk And then how do
you account for shipping charges and well breakage or ribcage
or whatever else costs money in acquiring those diapers Luckily
there exists the magic of transfer pricing transfer pricing tracks
expenses for separate departments within the same firms that do
internal business with each other like it more or less
sets the A price right sets the transfer prices prices
which you're transferring stuff from one division to another Well
the goal is to fairly attribute pricing to each division
such that everyone feels equally unfairly treated You could imagine
that the manager of the diaper sales division has her
own income statement and she probably earns her bonus based
on how profitable that division runs that year Well if
the big bad boss at corporate wants to show more
profit in the Global Mega Diaper Corp Then that boss
will lean on Missa Schimmel bottom to sell or rather
to transfer price her diapers at very cheap prices so
that Diaper Corp looks much more profitable than it really
would be or it paying market prices for its well
very raw materials Meanwhile the same thing's going on at
Globo sent Corp the higher the price they get for
the perfume they send you the better their numbers will
look More bonuses more promotions more cover stories in perfume
industry monthly On the other side of things you have
a similar incentive to get prices down like that's your
job The less you pay for the raw materials while
the better your profits look again Big bonuses at stake
here inside the division Better chance to climb that day
You know Slippery corporate ladder Yes these accounting gymnastics may
seem silly All the money just ends up in the
same big mega glop Huge corporate bottom line in the
end right Well if you send money to global mega
Diaper Corp Well it shows up on their quarterly reports
The Wall Street The Net Number two Global won't change
whether the diapers and perfume are transfer priced expensive or
transfer price cheap It's all global mega Giga Tech owes
money in the end literally but it matters for internal
accounting is that you have to think about it and
do it There are bonuses and the egos and all
the corporate game of thrones stuff at stake here But
there are legitimate business reasons to transfer Pricing allows accountants
to figure out the true cost and profitability of different
products This information allows global mega tow make informed decisions
about production distribution and marketing like what products are worth
keeping which ones should expand or killed If a manager
just grabbed a bunch of diapers or walked off with
a drum full of perfume without charging those cost to
their division wealth and when all the beans are coming
at the end of the day it would be impossible
to track the cross it took to actually make those
items So they all have to be tracked And the
resulting numbers would then cloud how well or poorly each
division was doing And you can imagine that there have
been times in business when an internal division is simply
poorly run like what if the perfume business could only
make that perfume for one hundred dollars a gallon But
the manager of Frog Rasta Beibei could by that same
identical perfume from another vendor for only seventy dollars a
gallon Well since the perfume diaper people are bonus on
profits why shouldn't they be allowed to buy that product
the best way they can buy it And it may
mean that the global sent division should in fact be
tossed out you know like a an old diaper and
shut down So transfer pricing shines a bright light on
the line operations of a business and allows managers to
figure out the true value of each of their products
without accurate transfer pricing A big company like global Mega
wouldn't be able to identify which products are inside really
profitable divisions and which ones are a drag on the
firm's finances So to get the diapers on Global Mega
Stipe ER division well you'll have to pay for the
product right It's time to go over now to the
Diaper Co And buy some diapers Well how do you
set that price Well there are three basic methods First
some details about the diapers A package of one hundred
diapers retails for fifty bucks It cost the diaper unit
twenty bucks to produce Okay now here the three methods
One pay for the cost of producing the diapers So
under the first method you'll just reimburse the diaper unit
for its costs in producing them You pay him twenty
bucks for the hundred diapers That's it The second method
You pay full retail price you'd give diaper code that
fifty dollars that they would have gotten if the diapers
had been sold at their store All right Third method
a negotiated amount somewhere in between Yeah some figure higher
than the cost but not quite the full retail price
So basically you'd get on the phone with some sales
guy at Diaper Co And basically just work out a
deal The transfer price you pay will depend on the
situation If diaper code isn't working at capacity you know
a price that cost or close to it makes sense
They can crank up production than pretty easily without causing
a problem that I propose you get wouldn't get made
if he didn't want them to be made However if
Diaper Cho is constantly selling out well then a transfer
price at or near retail price would make sense They
have orders piling up and if a cell to you
for a cheap price they're losing money selling to others
at a much higher price They're having trouble filling all
their orders Every diaper you take is a diaper then
that they can't sell to a retail price paying customer
You're literally costing them sales when you get the diapers
for closer to twenty bucks than fifty So you should
be treated Don't just like any other customer right Well
turns out diaper Cho is near capacity You'll have to
pay near full price However you negotiate a volume discount
and so you pay forty five bucks per package of
one hundred diapers Meanwhile you get another ten percent off
by promising that Jimmy the best softball player at Fragrance
Beibei will play for Diaper Co At the next company
picnic so you end up paying forty dollars fifty cents
for one hundred count package Alright now time to buy
the perfume when you call over global sent Corp They
have a deal for you Owed it to Tidewater Hasn't
been selling very well And they have a lot of
it sitting in the warehouse and are happy to get
rid of it You Khun basically get it at cost
Plus you talked them into letting you use some of
their pre cut budget just to take the extra barrels
of perfume off their hands So yeah that's transfer pricing
We could go into more depth but for now we'll 00:07:26.773 --> [endTime] just start with a spritz yellow