AUTONOMOUS TRANSACTIONS

 

The following is an examination of the roles of the manufacturing or production

division and the selling division from the standpoint of intracompany pricing and the

application of autonomous transactions.

Operations of the Production Division and the

Selling Division

The production division could be a profit center or merely a cost center. A cost

center production division has no authority over intracompany prices, whereas a

profit center production division might have this authority over intracompany prices.

At the outset, a production division that does have the authority over intracompany

prices would be tempted to maximize its intracompany price, with a goal of maximizing

net income for its own division. Then, bonuses and profit sharing for the production

division should follow from the divisional results, assuming the corporation

evaluates results based on bottom-line net income.

Similarly, a selling division could be a profit center or merely a cost center. A selling

division that has authority to determine intercompany prices would be tempted to

minimize its intercompany price, with a goal of maximizing net income from its division.

Bonuses and profit sharing would then presumably follow from the divisional

results, assuming the corporation evaluates results based on bottom-line net income.

Divisional autonomy is favored by managers in many situations because it gives

the manager authority that is similar to that of corporate management. The corporation

could more realistically base performance and rewards of the division on

financial outcomes. The manager’s authority is equal to the financial responsibility.

The autonomous divisional manager may have authority over capital investment

decisions, output levels, and pricing of the final good, as well as intercompany pricing.

Nevertheless, the transfer pricing regulations conspicuously ignore the possibility

that autonomy could occur. Intercompany transfers take place as if they were at

market when the division has autonomous decision-making authority.

Autonomy enables a division to purchase or sell to third parties, which can be

affected by excess capacity or by spare plant capacity. Because the divisions are not

required to trade with each other, internal transfers, if they occur, tend to be smaller

in volume.

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