Transfer pricing in a service industry. An engineering case study

Purtill, James (1996) Transfer pricing in a service industry. An engineering case study The University of Queensland:

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Author Purtill, James
Title of report Transfer pricing in a service industry. An engineering case study
Formatted title

Publication date 1996
Place of publication The University of Queensland
Total pages 63
Subjects 1503 Business and Management
Formatted abstract
The principal output of an engineering consultancy is the intellectual exertion of its members. In such an environment, management of capacity (ie. management of the available consulting hours) is a critical success factor. Scientific and engineering consultants possess a high level of idiosyncratic knowledge which cannot be readily enhanced by acquiring additional resources from the market in the short run. These factors of production can be considered fixed in the short run, and must be utilised at the highest practical capacity to achieve and sustain competitive advantage. Secondly, high consultant utilisation signals the need to expand capacity. A poorly operating transfer system will send incorrect signals that, for example, capacity increase is required in a location, without proper regard to slack resources elsewhere in the firm. The problem is how to attain and maintain full capacity across the entire firm consistently. The application of transfer pricing policy in this case has the goal of maximising the utilisation of capacity around the firm.

The proposed transfer pricing policy for EEC is based upon a mean marginal cost for each consulting category, plus the opportunity costs developed in Section 4.4. The earnings of the selling unit are fixed, as the selling unit is not able to influence the utilisation of the consultants once they are transferred to the buying unit. Simultaneously, the buying unit takes responsibility for the utilisation of the consultant and can be rewarded according to the level of utilisation of the transferred consultants. Managers must be provided incentives to encourage the maximisation of utilisation across the firm. It is proposed that utilisation become a key performance indicator as part of managers' reward systems. It is proposed that the transfer pricing policy be instigated via mandate.

In general, it is strongly recommended that transfers do not occur when the selling unit is at or above its practical capacity. The transfer pricing policies derived for EEC are based on excess capacity in the selling unit, and as such, the opportunity cost of transferring labour is not clearly known. Other strategies are required if no units have available capacity (eg. overtime, recruitment). This is the time when a sound transfer pricing policy can be used to signal the need for investment to increase capacity in the firm.

Document type: Research Report
Collection: MBA reports
Citation counts: Google Scholar Search Google Scholar
Created: Mon, 13 Dec 2010, 14:14:22 EST by Muhammad Noman Ali on behalf of The University of Queensland Library