Global Investors
1. What transfer pricing model is in the best interest of Global Investors, Inc.?
In order to clarify which pricing model is in the best interest of Global Investors, questions like “what pricing models have been used or proposed in GI?” and “what are the problems of these pricing models ?” must be answered first. And then compare those models; find a new model or a better combination of those models which can bring the best interest of Global Investors.
What pricing models have been used or proposed in GI?
a. cost- plus revenue allocation method
• The administrative departments providing support was treated as cost centres.
• Direct costs were recorded to subsidiaries, in direct costs allocated by using allocation method.
• Allocation from cost centres were based on cost centre manager’s estimation. Royalty expenses were charged to the New York office.
• New York retained all of the revenues generated worldwide and assigned GI’s subsidiaries a proportion of the revenue based on the local cost plus a 10% mark-up over the direct controllable costs.
Problems:
• This method resulted in a small profit for all subsidiaries.
• Subsidiary profits were not explicitly tied to the manager’s compensation.
• In accurate profits also could be viewed negatively by financial and tax regulators in the countries where the subsidiaries were located.
b. Assets under management (proposed by Mr Hoskins)
• GI’s revenue is allocated to the subsidiaries based on the subsidiaries pay a loyalty of 50% to New York as compensation for the R&D and trading strategies developed by headquarters. Problem:
• London was managing funds but did not mean they were generating a significant proportion of the value associated with them.
c. Allocating revenue based on the origin of the clients.
Problem:
• GI London’s revenue was declined from 26.5 million to 8.5 million
d. Splitting fee revenue 50:50 between client services and investment.
• 50% of the fee revenues
In order to clarify which pricing model is in the best interest of Global Investors, questions like “what pricing models have been used or proposed in GI?” and “what are the problems of these pricing models ?” must be answered first. And then compare those models; find a new model or a better combination of those models which can bring the best interest of Global Investors.
What pricing models have been used or proposed in GI?
a. cost- plus revenue allocation method
• The administrative departments providing support was treated as cost centres.
• Direct costs were recorded to subsidiaries, in direct costs allocated by using allocation method.
• Allocation from cost centres were based on cost centre manager’s estimation. Royalty expenses were charged to the New York office.
• New York retained all of the revenues generated worldwide and assigned GI’s subsidiaries a proportion of the revenue based on the local cost plus a 10% mark-up over the direct controllable costs.
Problems:
• This method resulted in a small profit for all subsidiaries.
• Subsidiary profits were not explicitly tied to the manager’s compensation.
• In accurate profits also could be viewed negatively by financial and tax regulators in the countries where the subsidiaries were located.
b. Assets under management (proposed by Mr Hoskins)
• GI’s revenue is allocated to the subsidiaries based on the subsidiaries pay a loyalty of 50% to New York as compensation for the R&D and trading strategies developed by headquarters. Problem:
• London was managing funds but did not mean they were generating a significant proportion of the value associated with them.
c. Allocating revenue based on the origin of the clients.
Problem:
• GI London’s revenue was declined from 26.5 million to 8.5 million
d. Splitting fee revenue 50:50 between client services and investment.
• 50% of the fee revenues