Ms. Marwan, one of the marketing managers, has come to the meeting with a number of reports about one of her products. The Marketing V.P. sees her agitation and asks her what the problem is. "Well, the product made by the East Coast Division is losing sales even after the price had been lowered drastically. The manager of the division is threatening to close because of the reduced demand."
The Marketing V.P. asks why the lowered prices are a problem and Ms. Marwan says that, according to the manager, the price used to transfer the goods to Southern Division are based on market price and, with the lowered market price, the unit-level costs are no longer being covered and he is losing money on every transfer as well as every third-party sale.
Required: Explain further to the Marketing V.P. the issues involved in transfer pricing when there are distressed market prices.

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The Answer of Ms. Marwan, one of the marketing managers, has come to the meeting with a number of reports about one of her products. The Marketing V.P. sees her agitation and asks her what the problem is. "Well, the product made by the East Coast Division is losing sales even after the price had been lowered drastically. The manager of the division is threatening to close because of the reduced demand."
The Marketing V.P. asks why the lowered prices are a problem and Ms. Marwan says that, according to the manager, the price used to transfer the goods to Southern Division are based on market price and, with the lowered market price, the unit-level costs are no longer being covered and he is losing money on every transfer as well as every third-party sale.
Required: Explain further to the Marketing V.P. the issues involved in transfer pricing when there are distressed market prices.

Ms Marwan, One of the Marketing Managers, Has Come to the Meeting