Transfer Pricing--Can It Effectively Be Applied To Computer Services?
Strait, Michael R.
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The problem. From a financial point of view, the primary function of the data processing department is to maximize the benefit the firm receives from its data processing resources. Though such a goal may be generally accepted, it is not entirely clear how it is achieved. This thesis seeks to remedy this situation by applying transfer price to computer services. Procedure. The research procedure consisted of an analysis of transfer price theory and its varied applications. Next, the most generally accepted methods of transfer price theory were applied to an actual computer processing site to determine if any were applicable. Findings. Transfer pricing is most generally applied in one of the following four alternatives: (1) market price, a price based on a competitive external market; (2) negotiated price, a price mutually agreed to by the parties involved; (3) marginal cost, a price based on costs that vary with output and; (4) full cost, price based on variable and fixed costs of the supplying division. Three units of transfer were determined, batch processing, online processing and developmental. Given four objectives, transfer price must be equitable, reproducible, understandable and return no profit or loss. Full cost approach was found to be the most applicable. Recommendations. The transfer price system as developed herein be implemented in a test environment initially. Even though the full cost alternative appeared to be the "best," a hint of marginal cost was obvious. The marginal cost would be a horizontal line or a close approximation. After a period of time, cost trends will substantiate the system or support the marginal cost approach.
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