Transfer pricing methods are used to determine the prices at which transactions occur between

different entities within a multinational company. Here's a brief description of each method along with
examples of multinational companies that might use them:

1. Comparable Uncontrolled Price (CUP):

 Description: This method compares the price charged for goods or services transferred
between related entities with the price charged for similar transactions between
unrelated parties.

 Example: Apple Inc. might use CUP when pricing the transfer of components between its
subsidiaries based in different countries, comparing those prices with market prices for
similar components.

2. Cost Plus Method (CPM):

 Description: CPM involves adding a markup (or profit margin) to the costs incurred by
the selling entity to produce the transferred goods or services.

 Example: Ford Motor Company could use CPM when determining the price of
automotive parts transferred from its manufacturing subsidiary to its assembly
subsidiary, adding a predetermined profit margin to the production costs.

3. Resale Price Method (RPM):

 Description: RPM involves applying a markup to the resale price of goods or services
sold by the buying entity to unrelated customers.

 Example: Walmart might use RPM to determine the transfer price of products
purchased from its international suppliers before selling them through its retail stores,
applying a predetermined markup to the purchase price.

4. Transactional Net Margin Method (TNMM):

 Description: TNMM compares the net profit margin earned by a related entity from a
controlled transaction with the net profit margin earned by comparable unrelated
entities.

 Example: Coca-Cola might use TNMM to assess the profitability of its bottling
subsidiaries by comparing their net profit margins with those of independent bottling
companies operating in similar markets.

5. Profit Split Method (PSM):

 Description: PSM allocates profits from controlled transactions between related entities
based on their relative contributions to generating those profits.

 Example: Procter & Gamble might use PSM to allocate profits generated from the sale of
jointly developed products between its research and development center and its
manufacturing subsidiaries in different countries.
 6. Transactional Profit Split Method (TPSM):

 Description: TPSM is a variation of the profit split method that allocates profits from
controlled transactions based on the contributions of each related entity to generating
those profits.

 Example: Microsoft might use TPSM to allocate profits derived from collaborative
software development projects between its research and development centers located
in different countries.

7. Advance Pricing Agreement (APA):

 Description: An APA is an agreement between a taxpayer and tax authorities regarding

the transfer pricing method to be used and the appropriate pricing for specific
transactions in advance of those transactions occurring.

 Example: Google might enter into an APA with tax authorities to agree on the transfer
pricing methodology and pricing for its licensing of intellectual property to its
subsidiaries located in various countries to mitigate transfer pricing disputes

RELEVENT COST FOR DECISION MAKING

Relevant costs, also known as differential costs, are the costs that differ between alternatives being
considered in a decision-making process. When making decisions, especially in business, it's crucial to
focus on relevant costs rather than considering all costs. Relevant costs help in making informed
decisions by focusing on the costs that will change based on the alternatives being evaluated

1. Make or Buy Decision:

Imagine your company is considering whether to manufacture a component

internally or buy it from an external supplier. Relevant costs in this decision
would include:

 Direct materials: Cost of raw materials needed for manufacturing.

 Direct labor: Wages and salaries for workers directly involved in
production.
 Variable manufacturing overhead: Overhead costs that vary with the
level of production, such as utilities or supplies.
 Any additional costs associated with manufacturing internally: These
could include setup costs, additional machinery, or training costs.
 Purchase price if buying externally: The cost per unit to purchase the
component from an external supplier.
 Example: Tesla, Inc. Tesla, known for its electric vehicles, had to decide whether to manufacture
batteries internally or buy them from external suppliers. In 2015, Tesla announced its plan to
build the Gigafactory, where it would produce batteries in-house. By vertically integrating
battery production, Tesla aimed to reduce costs, ensure a stable supply chain, and maintain
control over the technology.

2. Special Order Cost:

Suppose your company receives a one-time special order for a product at a

discounted price. Relevant costs would include:

 Direct materials: Cost of materials needed specifically for the special

order.
 Direct labor: Wages and salaries for workers directly involved in
producing the special order.
 Variable manufacturing overhead: Additional overhead directly
associated with producing the special order.
 Any additional costs associated with fulfilling the special order: This
could include expedited shipping costs or overtime wages

Example: Apple Inc. Apple occasionally receives special orders for customized products, such as
bulk purchases from corporate clients or educational institutions. When evaluating these orders,
Apple considers the incremental costs of producing the customized devices. If the revenue from
the special order exceeds the incremental costs, Apple may accept the order to capitalize on the
additional revenue stream without significantly impacting its regular operations.

3. Discontinuation or Continuation Cost:

If your company is contemplating whether to discontinue or continue a

particular product line or operation, relevant costs would include:

 Direct materials: Materials directly used in producing the product line

or operation.
 Direct labor: Labor costs associated with producing the product line or
operation.
 Variable manufacturing overhead: Overhead costs that vary with the
level of production.
 Fixed overhead directly attributable to the product line or operation:
This includes costs like rent for dedicated facilities or salaries for
managers specifically overseeing this operations

Example: Procter & Gamble (P&G) P&G regularly evaluates the performance of its product lines
to determine whether to discontinue or continue them. For instance, in recent years, P&G
 discontinued several underperforming brands, such as Clairol and CoverGirl, to focus on higher-
growth segments. The decision involves assessing the direct costs (e.g., production costs) and
fixed overhead costs associated with each product line to determine its profitability and
strategic fit within the company's portfolio.

4. Opportunity Cost:

Let's say your company is considering investing in one of two projects. The
opportunity cost would be the value of the next best alternative foregone.
For example:

 If the company decides to invest in Project A, the opportunity cost

would be the potential revenue or benefits lost from not choosing
Project B.
 Implicit costs: These are costs not reflected in accounting records, such
as the owner's salary if they could be earning more elsewhere.
 Foregone revenue: Revenue that could have been earned if resources
were allocated differently. For instance, if your company decides to use
a piece of machinery for one project, it can't be used for another,
potentially lucrative project

Example: Alphabet Inc. (Google) Alphabet, the parent company of Google, faces numerous
investment decisions across its diverse portfolio of businesses, ranging from search and
advertising to cloud computing and autonomous vehicles. For instance, when allocating
resources for research and development (R&D) projects, Alphabet evaluates the opportunity
cost of investing in one project over another. This includes considering the potential revenue
and strategic impact of each project, as well as the long-term growth prospects of the company

COQ

COQ identifying Cost of Quality (COQ) involves a systematic approach to understanding and categorizing
the expenses associated with quality management within an organization. Here's how you can identify
COQ:

1. Gather Data: Begin by collecting relevant data related to quality management expenses. This
may include financial records, production reports, customer feedback, and quality assurance
documentation. For instance, a manufacturing company might gather data on the number of
defective products, warranty claims, and rework costs.

2. Categorize Costs: After gathering data, categorize costs into different groups. The main
categories typically include prevention costs, appraisal costs, internal failure costs, and external
failure costs. For example, Toyota categorizes its quality-related costs into prevention, appraisal,
internal failure, and external failure costs to manage quality effectively across its operations.
 3. Prevention Costs Identification: These are costs incurred to prevent defects from occurring in
the first place. Examples include training employees, implementing quality control systems, and
conducting preventive maintenance. Apple invests heavily in prevention costs by ensuring
rigorous quality control measures in its manufacturing processes to minimize the risk of defects
in its products.

4. Appraisal Costs Identification: Appraisal costs are associated with evaluating the level of quality
achieved. This includes inspection, testing, and quality audits. An example is Samsung, which
invests in rigorous testing procedures for its electronic products to identify any defects before
they reach the market.

5. Internal Failure Costs Identification: These costs arise when defects are identified before
products are delivered to customers. They include scrap, rework, and downtime due to quality
issues. For example, Volkswagen incurred significant internal failure costs due to the emissions
scandal, including fines, recalls, and legal fees.

6. External Failure Costs Identification: External failure costs occur when defects are identified
after products have been delivered to customers. This includes warranty claims, product recalls,
and loss of reputation. Boeing faced substantial external failure costs due to safety issues with
its 737 MAX aircraft, including compensation to airlines and damage to its brand reputation.

7. Quantify Costs: Assign monetary values to each category of quality costs to quantify the overall
cost of quality. This allows organizations to understand the financial impact of quality
management practices. For example, General Motors quantifies its quality costs to assess the
effectiveness of its quality improvement initiatives and prioritize investments accordingly.

8. Summarize and Analyze: Once costs are quantified, summarize the findings and analyze the
data to identify patterns, trends, and areas for improvement. For instance, Ford Motor Company
analyzes its quality cost data to identify root causes of defects and implement corrective actions
to enhance product quality and reduce costs.

9. Continuous Improvement: Finally, use the insights gained from analyzing quality costs to drive
continuous improvement efforts. This involves implementing changes to processes, systems,
and practices to enhance quality and reduce costs over time. For example, Toyota continuously
improves its manufacturing processes based on quality cost data to maintain its reputation for
producing high-quality vehicles efficiently.

By following these steps and using real-world examples, organizations can effectively identify and
manage their cost of quality to enhance overall performance and competitiveness.

Reducing Cost of Poor Quality (COPQ)

Reducing the Cost of Poor Quality (COPQ) involves minimizing the expenses incurred due to defects,
errors, and inefficiencies in processes or products. Here's how to approach reducing COPQ

1. Identify Root Causes: Before you can address the Cost of Poor Quality (COPQ), you need to
understand what's causing it. This might involve analyzing processes, gathering data, and
 identifying where defects or errors originate. For instance, Toyota famously employs the "5
Whys" technique to drill down to the root cause of quality issues.

2. Implement Prevention Measures: Once you've identified the root causes, it's crucial to
implement measures to prevent those issues from occurring again. For example, pharmaceutical
companies like Pfizer invest in advanced quality management systems and stringent protocols to
prevent errors in manufacturing processes.

3. Enhance Quality Control: Quality control ensures that products or services meet predefined
standards. For instance, Apple implements rigorous quality control measures throughout its
supply chain to maintain the high standards of its products, reducing the likelihood of defects
reaching customers.

4. Optimize Processes: Streamlining and optimizing processes can significantly reduce the chances
of errors or defects occurring. Amazon constantly optimizes its logistics and fulfillment
processes to minimize errors and improve efficiency in delivering packages to customers.

5. Invest in Technology: Technology can automate processes, improve accuracy, and enhance
overall quality. For example, Tesla utilizes advanced automation and robotics in its
manufacturing processes to reduce defects and ensure consistency in its electric vehicles.

6. Empower Employees: Employees are often the first line of defense against quality issues.
Empowering them with proper training, tools, and authority can help catch and address issues
early on. For instance, companies like Zappos empower customer service representatives to
resolve customer complaints promptly, reducing the impact of quality issues on customer
satisfaction.

7. Supplier Collaboration: Collaborating closely with suppliers can help ensure the quality of inputs
and materials. Companies like Nike work closely with their suppliers to establish quality
standards and processes, reducing the risk of defects in their products.

8. Customer Feedback Loop: Feedback from customers can provide valuable insights into quality
issues and areas for improvement. Companies like Airbnb regularly collect feedback from users
to identify and address quality issues in their platform and services.

9. Continuous Monitoring and Improvement: Quality management is an ongoing process that

requires continuous monitoring and improvement. Companies like Google employ techniques
such as Six Sigma and Kaizen to continuously improve their processes and reduce the occurrence
of defects or errors in their products and services.

TYPES OF COQ

1. Prevention Costs: Prevention costs are expenses incurred to prevent defects from occurring in
the first place. These costs are proactive investments aimed at maintaining high quality
throughout the production process.

Example: Tesla invests significantly in prevention costs to ensure the quality of its electric vehicles. They
conduct extensive research and development to design robust systems and components, implement
stringent quality control measures in manufacturing plants, and provide comprehensive training to
employees to prevent errors and defects in the production process.

2. Appraisal Costs: Appraisal costs refer to the expenses associated with evaluating and assessing
the level of quality achieved. These costs are incurred to detect defects through inspections,
testing, and quality audits.

Example: Apple allocates substantial resources to appraisal costs to maintain the quality of its products.
They conduct rigorous testing of hardware and software components, perform quality checks at various
stages of production, and utilize advanced inspection techniques to identify any defects before products
are shipped to customers.

3. Internal Failure Costs: Internal failure costs arise when defects are identified before products
are delivered to customers. These costs include rework, scrap, and downtime due to quality
issues encountered within the organization.

Example: Samsung faces internal failure costs when defects are detected during the production process
of its electronic devices. These costs include the reworking of faulty components, scrapping of defective
units, and the loss of production time required to address quality issues before products are released to
the market.

4. External Failure Costs: External failure costs occur when defects are identified after products
have been delivered to customers. These costs encompass warranty claims, product recalls,
customer returns, and damage to reputation.

Example: Toyota incurs external failure costs when quality issues lead to product recalls and customer
complaints. For instance, if a safety-related defect is discovered in their vehicles post-production, Toyota
may face expenses related to recalling and repairing the affected units, compensating customers for any
damages incurred, and rebuilding trust with consumers to mitigate the impact on its brand reputation.

. Pricing Strategies:

. Cost-Plus Pricing,

Target Costing,

Market-Based Pricing

PRICING STRATEGIES

Cost-Plus Pricing

1. Standard Cost-Plus Pricing

2. Full-Cost Pricing

3. Variable Cost-Plus Pricing

Target Costing

1. Cost-Plus Target Pricing

2. Market-Driven Target Pricing

3. Value-Based Target Pricing

Market-Based Pricing

1. Skimming Pricing

2. Penetration Pricing

3. Price Discrimination, describe each point with example of current real companies

PRICING STRATEGIES
are methods and approaches used by businesses to determine the optimal prices for their products or
services. These strategies involve setting prices that consider factors such as production costs,
competitor pricing, customer demand, perceived value, and overall business goals. The goal of pricing
strategies is to maximize revenue, profit, market share, or customer satisfaction, depending on the
specific objectives of the business there are main three strategies

 cost plus pricing

 target costing
 Market-Based Pricing

COST-PLUS PRICING

is a pricing strategy where a company determines the selling price of a product or service by adding a
markup (or profit margin) to the cost of production. The cost considered can vary depending on the type
of cost-plus pricing being used, but typically includes factors such as direct materials, direct labor, and
overhead costs

1. Standard Cost-Plus Pricing:

 Explanation: Standard cost-plus pricing involves setting a price by adding a markup to

the standard cost of producing a product or delivering a service. The standard cost
 includes direct materials, direct labor, and overhead costs based on predetermined
standards.

 Example: An example of a company using standard cost-plus pricing is Ford Motor

Company. Ford determines the standard cost of producing each vehicle by considering
material costs, labor costs, and overhead. Then, they add a markup percentage to cover
profit and other expenses to set the final selling price.

2. Full-Cost Pricing:

 Explanation: Full-cost pricing involves setting a price by including all costs associated
with producing a product or service, including both variable and fixed costs, and adding
a markup for profit.

 Example: A good example of a company using full-cost pricing is Apple Inc. Apple
includes not only the variable costs of producing iPhones, such as materials and labor,
but also the fixed costs such as research and development, marketing, and
administrative expenses when setting the price for their products.

3. Variable Cost-Plus Pricing:

 Explanation: Variable cost-plus pricing sets the price by adding a markup to cover only
the variable costs of producing a product or delivering a service. Fixed costs are not
included in the pricing calculation.

 Example: Amazon's fulfillment services can serve as an example of variable cost-plus

pricing. Amazon charges third-party sellers a fee based on the weight and dimensions of
the products they store and fulfill. This fee covers variable costs such as storage,
packaging, and shipping, but it doesn't include fixed costs like warehouse rent or salaries
of fulfillment center staff.

TARGET COSTING

is a cost management strategy used by companies to determine the maximum cost at which a product
can be produced while still achieving a desired profit margin. This approach involves setting a target
selling price based on market conditions and customer expectations, then subtracting the desired profit
margin to arrive at the target cost. The aim is to design and produce products that meet customer needs
at a cost that ensures profitability

1. Cost-Plus Target Pricing:

 Explanation: Cost-plus target pricing involves setting a target selling price by considering
the desired profit margin and adding it to the estimated cost of producing a product or
delivering a service. The cost is typically determined based on factors such as direct
materials, direct labor, and overhead costs, but the emphasis is on achieving a specific
profit target.
  Example: One example of a company utilizing cost-plus target pricing is Boeing. When
Boeing develops new aircraft, it sets a target cost based on its estimated production and
development costs. Then, it adds a desired profit margin to determine the selling price
for the aircraft.

2. Market-Driven Target Pricing:

 Explanation: Market-driven target pricing involves setting a target selling price based on
the prevailing market conditions, such as competitors' prices, customer demand, and
perceived value in the marketplace. The focus is on aligning the selling price with what
customers are willing to pay while still achieving profitability.

 Example: Coca-Cola is a prime example of a company employing market-driven target

pricing. Coca-Cola continually monitors the prices of its competitors, analyzes consumer
preferences, and considers factors like consumer income levels and purchasing power in
different markets to set prices for its beverages accordingly.

3. Value-Based Target Pricing:

 Explanation: Value-based target pricing focuses on setting a target selling price based on
the perceived value of the product or service to the customer. This approach considers
the benefits and features of the product/service relative to its competitors and
determines a price that reflects the value it provides to customers.

 Example: Apple Inc. is a notable example of a company employing value-based target

pricing. Apple positions its products, such as iPhones and MacBooks, as premium
offerings with innovative features and sleek designs. The company sets prices for its
products based on the perceived value they offer to consumers, rather than solely
relying on production costs or market competition

MARKET-BASED PRICING

is a pricing strategy where the selling price of a product or service is determined by considering market
conditions such as customer demand, competitor prices, and perceived value. Rather than focusing
solely on production costs, market-based pricing sets prices based on what consumers are willing to pay
for a product or service in the current market environment. This approach aims to optimize revenue and
capture the value that customers place on the offering

1. Skimming Pricing:

 Explanation: Skimming pricing involves setting a high initial price for a product when it is
launched and targeting customers who are willing to pay a premium for new or
innovative products. Over time, the price may be gradually lowered to attract more
price-sensitive customers.
  Example: Apple often uses skimming pricing for its new product launches. When Apple
introduces a new iPhone model, it initially prices it at a premium to capitalize on early
adopters and brand enthusiasts who are willing to pay top dollar for the latest
technology. As demand stabilizes and competitors enter the market, Apple gradually
reduces the price to reach a broader customer base.

2. Penetration Pricing:

 Explanation: Penetration pricing involves setting a low initial price for a product to
quickly gain market share and attract a large customer base. The goal is to establish the
product in the market and encourage rapid adoption, even if it means initially accepting
lower profit margins.

 Example: Huawei, a Chinese multinational technology company, has employed

penetration pricing strategies in its smartphone business. Huawei initially priced its
smartphones competitively lower than those of established rivals like Apple and
Samsung to quickly gain market share, particularly in emerging markets. Once it
established a significant customer base, it gradually adjusted its pricing strategy.

3. Price Discrimination:

 Explanation: Price discrimination involves charging different prices to different

customer segments for the same product or service, based on factors such as
willingness to pay, purchasing power, or consumer behavior. This strategy aims to
capture the maximum value from each customer group.

 Example: Airlines commonly practice price discrimination by offering different ticket

prices based on factors like booking time, class of service, and flexibility. For instance,
business travelers who book last-minute tickets with flexible terms may pay higher
prices compared to leisure travelers who book well in advance and are willing to accept
restrictions on changes. This allows airlines to maximize revenue by extracting different
prices from different customer segments