CHAPTERSI

XANDSEVEN
Pr
ici
ngDeci
sions,
CostManagementandt
ransf
erpr
ici
ng
6.
1Maj
orI
nfl
uencesonPr
ici
ngDeci
sions
How compani espr iceapr oductoraser v i
ceul t i
mat elydependsont hedemandand
suppl yfori t.Thr eei nfluencesondemandandsuppl yar ecust omers,compet itors,and
costs.
6.1.1Cust omer s
Cust omer si nfluencepr icet hr ought heiref fectont hedemandf orapr oductorser vice,
basedonf act orssuchast hef eat uresofapr oductandi tsqual it
y.Ast heTat aMot or s
exampl eillustrates,compani esmustal way sexami nepr icingdeci sionst hr ought he
eyesoft heircust omer sandt henmanagecost stoear napr ofit
.
6.1.2Compet itors
Nobusi nessoper atesi nav acuum.Compani esmustal way sbeawar eoft heact i
onsof
thei
rcompet itors.Atoneext reme, alternativeorsubst ituteproduct sofcompet itorshur t
demandandf or ceacompanyt ol owerpr i
ces.Att heot herext reme, acompanywi thout
acompet i
tori sf reet osethi gherpr ices.Whent herear ecompet i
tor
s,compani est ryt o
l
earnaboutcompet itors’t echnol ogi es,pl antcapaci ties,andoper atingst rat egiest o
esti
mat ecompet itors’cost s—v aluablei nfor mationwhenset ti
ngpr i
ces.
Because compet iti
on spans i nternat i
onalbor ders,f luctuati
ons i n exchange r ates
betweendi fferentcount ri
es’ cur renciesaf fectcost sandpr ici
ngdeci si ons.Forexampl e,
i
ft hey enweakensagai nstt heU. S.dol l
ar ,Japanesepr oduct sbecomecheaperf or
Amer i
canconsumer sand, consequent ly,mor ecompet it
iveinU. S.mar kets.
6.1.3Cost s
Cost sinf l
uencepr icesbecauset heyaf fectsuppl y.Thel owert hecostofpr oduci nga
product ,thegr eatert hequant it
yofpr oductt hecompanyi swi lli
ngtosuppl y
.Gener all
y,
ascompani esi ncr easesuppl y, t
hecostofpr oduci nganaddi ti
onaluni ti ni
ti
allydecl ines
butev entual l
yi ncr eases.Compani essuppl ypr oductsasl ongast her ev enuef rom
sell
ingaddi ti
onaluni t
sexceedst hecostofpr oduci ngt hem.Manager swhounder stand
the costofpr oduci ng pr oduct s setpr ices t hatmake t he pr oduct s attractivet o
customer swhi l
emaxi mizingoper ati
ngi ncome.

6.
2CostingandPr
ici
ngfortheShor
tRunandl
ongr
un
6.
2.1Costi
ngandPri
cingf
ortheShortRun
Shor
t-runpri
cingdeci
sionstypi
cal
lyhaveat i
mehor izonoflessthanay earandi nclude
deci
sionssuchas(a)prici
ngaone-ti
me-onlyspecialorderwit
hnol ong-r
uni mpli
cations
and(b)adj
usti
ngproductmi xandoutputv
olumei nacompet iti
vemar ket.
Long-runpri
cingdeci
sionshaveat i
mehor i
zonofay earorl
ongerandi ncludeprici
nga

1
producti namar ketwher et her ei ssomef lexibi li
tyi nset ti
ngpr ice.
Consi derashor t-
r unpr i
cingdeci sionf aci ngt hemanagementt eam atAst elComput er s.
Ast elmanuf act urest wobr andsofper sonalcomput er s(PCs) —Deskpoi nt ,Ast el’st op-of -
the- l
inepr oduct ,andPr ov alue,al ess- power fulPent ium chi p-basedmachi ne.Dat atech
Cor por at i
onhasaskedAst eltobi donsuppl ying5, 000Pr ov aluecomput er sov ert hel ast
threemont hsof2010.Af t
ert hi st hree- mont hper iod,Dat at echi sunl ikel yt opl aceany
futur esal esor der swi thAst el .Dat atechwi llsel lPr ovaluecomput er sunderi tsown
brandnamei nr egi onsandmar ket swher eAst eldoesnotsel lPr ov alue.Whet herAst el
accept sorr eject st hisor derwi llnotaf fectAst el ’
sr ev enuesnei thertheuni tssol dort he
sellingpr i
ce—f rom exi sti
ngsal eschannel s.
Rel ev antCost sf orShor t-RunPr icingDeci sions
Bef oreAst elcanbi donDat atech’ sof fer,Ast el’smanager smustest i
mat ehowmuchi t
willcostt osuppl yt he5, 000comput ers.Ther elev antcost sAst el’
smanager smust
focusoni ncl udeal ldi rectandi ndirectcost st hr oughoutt hev aluechai nt hatwi llchange
i
nt otalbyaccept ingt heone- time- onlyspeci alor derf rom Dat atech.Ast el’
smanager s
out li
net her elev antcost sasf ol lows:
Directmat erials( $460percomput er*5, 000comput ers)…………………. .
$2, 300, 000
Directmanuf act ur ingl abor( $64percomput er*5, 000comput ers)…………. .320, 000
Fixedcost sofaddi tional capaci tyt omanuf act ur ePr ovalue…………………. .250, 000
Tot al cost s…………………………………………………………………….$2, 870, 000
Ther elevantcostpercomput eri s$574( $2, 870, 000÷5, 000) .Ther ef ore,anysel ling
priceabov e$574wi l
li mpr ov eAst el’
spr ofitabi li
t yi nt heshor tr un.Whatpr iceshoul d
Ast el’smanager sbi df ort he5, 000- comput eror der ?
Strat egi candOt herFact or sinShor t-RunPr i
ci ng
Basedoni tsmar keti ntelli
gence,Ast elbel i
ev est hatcompet i
ngbi dswi llbebet ween
$596and$610percomput er,soAst elmakesabi dof$595percomput er .Ifi twi nst hi s
bid,oper at ing i ncomewi llincr easeby$105, 000 ( relev antr ev enues,$595 5, 000 =
$2,975, 000mi nusr elev antcost s,$2, 870, 000) .I nlightoft heext r
acapaci t
yandst rong
compet iti
on,management ’sst rategyi st obi dashi ghabov e$574aspossi blewhi l
e
remai ningl owert hancompet i
t or s’bids.
Whati fAst elwer et heonl ysuppl i
erandDat at echcoul dunder cutAst el’ssel li
ngpr icei n
Ast el’scur rentmar ket s?Ther el evantcostoft hebi ddingdeci sionwoul dt heni nclude
thecont ribut ionmar gi nl ostonsal est oexi stingcust omer s.Whati ft her ewer emany
par ti
eseagert obi dandwi nt heDat atechcont ract ?I nt hiscase, thecont ribut ionmar gin
l
ostonsal est oexi stingcust omer swoul dbei r r
el evantt ot hedeci sionbecauset he
exist i
ngbusi nesswoul dbeunder cutbyDat at echr egar dlessofwhet herAst elwi nst he
cont ract .
Incont rastt ot heAst elcase,i nsomeshor t-runsi t uat i
ons,acompanymayexper ience
strongdemandf ori tspr oduct sorhav el imi t edcapaci ty .Int heseci rcumst ances,a
companywi llstrat egi cal l
yi ncreasepr icesi nt heshor trunt oasmuchast hemar ketwi l
l

2
bear.
Weobser vehighshort-
runpri
cesi nthecaseofnewpr oductsornewmodel sofol
der
products,
suchasmi cr
oprocessors,computerchi
ps,cel
lul
artelephones,
andsof
twar
e.
EffectofTimeHori
zononShor t
-RunPr i
cingDeci
sions
Twokeyf actor
saffectshort
-r
unpr i
cing.

1.Manycostsarei r
relevantinshor t-
runprici
ngdecisions.IntheAst elexample,mostof
Astel
’scostsin R&D,desi gn,manuf acturi
ng,mar keting,dist
ributi
on,and customer
servi
ceareirr
elevantf ortheshor t-runpr i
cingdecision,becauset hesecost swil
lnot
changewhetherAst elwi nsordoesnotwi nt heDat at
echbusi ness.Thesecost swil
l
changei
nthelongr unandt hereforewillberelevant
.
2.Short
-r
unpr i
cingi soppor tunist
ic.Pricesar edecreasedwhendemandi sweakand
competi
ti
onisst rongandi ncreasedwhendemandi sst r
ongandcompet it
ionisweak.
Aswewi l
lsee,l
ong- r
unpr icesneedt obesett oearnar easonablereturnoninvest
ment.
6.
2.2Cost
ingandPr
ici
ngf
ort
heLongRun
Long- r
unpr icingi sast rategicdeci siondesi gnedt obui ldl ong-runr elati
onshipswi th
cust omer sbasedonst ableandpr edict ablepr i
ces.Ast abl epr i
cer educest heneedf or
cont inuousmoni tor i
ngofpr i
ces,i mpr ovespl anning,andbui l
dsl ong- r
unbuy er–sel l
er
relationshi ps.Butt o char ge a st able pr i
ce and ear nt he targetl ong- run return,a
companymust ,ov erthel ongr un,knowandmanagei tscost sofsuppl yingproduct st o
cust omer s.
Aswewi llsee,r elev antcost sforl ong- runpr i
cingdeci sionsi ncludeal lfuturef i
xedand
var i
ablecost s.
Alternat i
v eLong- RunPr icingAppr oaches
Howshoul dmanager satAst elusepr oductcosti nformat iont opr icePr ov aluein2012?
Twodi fferentappr oachesf orpr i
cingdeci sionsar easf ollows:
1.Mar ket-based
2.Cost -
based, whichi sal socal ledcost -plus
Themar ket -basedappr oacht opr i
cingst art
sbyaski ng,“ Givenwhatourcust omer s
wantandhowourcompet itorswi llreactt owhatwedo,whatpr iceshoul dwechar ge?”
Basedont hispr ice,manager scont rolcost st oear nat ar getr eturnoni nvestment .The
cost -basedappr oacht opr i
cingst artsbyaski ng,“ Gi
v enwhati tcost sust omaket his
product ,whatpr iceshoul dwechar get hatwi l
lrecoupourcost sandachi eveat arget
returnoni nv estment ?”
Compani esoper atingi ncompet i
ti
v emar kets( f
orexampl e,commodi ti
essuchasst eel,
oil,andnat uralgas)uset hemar ket-basedappr oach.Thei temspr oducedorser vices
prov i
dedbyonecompanyar ev erysi mi l
art oitemspr oducedorser vicespr ov i
dedby
other s.Compani esi nthesemar ketsmustacceptt hepr icessetbyt hemar ket.
Compani esoper atingi nl esscompet i
tivemar ketsofferpr oduct sorser v i
cest hatdi ff
er
from eachot her( f orexampl e,aut omobi l
es,comput ers,managementconsul ti
ng,and
3
l
egalser vices),canuseei thert hemar ket-basedorcost -basedappr oachast hest arti
ng
pointf orpr i
cing deci si
ons.Some compani es f i
rstl ook atcost s because cost
i
nfor mationismor eeasi lyav ailableandt henconsi dercust omersorcompet i
tors:the
cost-basedappr oach.Ot hersst ar tbyconsi deri
ngcust omer sandcompet i
tor
sandt hen
l
ook atcost s:t he mar ket-based appr oach.Bot h appr oaches considercust omer s,
compet it
or s,andcost s.Onl ythei rstar
t i
ngpoi ntsdiff
er.Managementmustal way skeep
i
nmi ndmar ketf orces,r egardl essofwhi chpr i
cingappr oachi tuses.Forexampl e,
bui
ldingcont ractorsof t
enbi donacost -plusbasi sbutt henr educetheirpri
cesdur i
ng
negot i
ati
onst or espondt oot herl ower-costbi ds.
Compani esoper atingi nmar ket st hatarenotcompet iti
vef avorcost-
basedappr oaches.
That ’
sbecauset hesecompani esdonotneedt orespondorr eacttocompet it
ors’pri
ces.
Themar gintheyaddt ocost st odet er
mi nepr i
cedependsont heval
uecust omerspl ace
ont heproductorser vice.
Mar
ket
-basedappr
oach
TargetCost i
ngf orTar getPrici
ng
Market-basedpr i
cingst artswit
hat argetprice.At argetpricei stheestimatedpricef
or
aproductorser vi
cet hatpotentialcustomer sar ewilli
ngt opay .Thisestimateisbased
onanunder standingofcust omer s’perceiv
edv al
uef orapr oductorser viceandhow
compet i
tors willpr ice compet i
ng pr oducts or ser v
ices.Thi s understandi
ng of
customer sandcompet i
torsi
sbecomi ngincreasinglyimpor tantforthreereasons:
1.Compet it
ionf r
om l ower-
costpr oducersiscont inuall
yr estr
ainingpri
ces.
2. Pr oductsar eont hemar ketforshor t
erper i
odsoft i
me,l eavi
nglesst i
meand
oppor t
unitytor ecoverfrom pr i
cingmi stakes,lossofmar ketshare,andlossof
profi
tabil
it
y.
3. Cust omer s are becomi ng mor e knowl edgeabl e and i ncessantl
y demanding
productsofhi gherandhi gherqual i
tyatlowerandl owerpr ices.
Cost
-Pl
usPr
ici
ng
Insteadofusi ngt hemar ket-basedappr oachf orlong-runpr i
cingdeci sions,manager s
somet i
mesuseacost -basedappr oach.Thegener alformulaf orset t
ingacost -
based
priceaddsamar kupcomponentt ot hecostbaset odet er
mineapr ospectivesel
ling
price.
Becauseamar kupi sadded, cost-basedpr icingisof t
encalledcost -pl
uspr ici
ng,wit
ht he
plusr efer
ringtot hemar kupcomponent .Manager suset hecost -
pluspr i
cingformulaas
ast arti
ngpoi nt .Themar kupcomponenti sr ar
elyar i
gidnumber .Inst
ead,i tisfl
exible,
dependi ngont hebehav iorofcust omer sandcompet i
tors.Themar kupcomponenti s
ulti
mat elydeter minedbyt hemar ket.
Cost -
PlusTar getRat eofRet urnonI nv estment
Wei l
lustrateacost -pl
uspr i
cingf ormul af orPr oval
ueI Iassumi ngAst elusesa12%
mar kupont hef ulluni
tcostoft heproductwhencomput ingthesel l
ingprice.

4
Costbase( full uni tcostofPr ov al
ueI I
)…………….$720. 00
Mar kupcomponentof12%( 0.12*$720)……………. 86. 40
Prospect ivesel lingpr ice……………………………. .
$806. 40
Howi st hemar kupper cent ageof12%det ermi ned?Onewayi st ochooseamar kupt o
earnat argetr ateofr eturnoni nvestment .Thet argetr ateofr eturnoni nvest menti sthe
tar
getannualoper at i
ngi ncomedi v
idedbyi nvest edcapi t
al.Investedcapi talcanbe
definedi nmanyway s.I nt hischapt er,wedef inei tast otalassets—t hatar e,long-term
assetspl uscur rentasset s.SupposeAst el’s( pretax)t ar getrateofr et
ur noni nv estment
i
s18%andPr ov alueI I’
scapi talinvestmenti s$96mi lli
on.Thet argetannualoper ati
ng
i
ncomef orPr ov al ueI Iisasf ollows:
Investedcapi tal …………………………………………………………………. .$96, 000,000
Targetr at eofr etur noni nv est ment……………………………………………………. .18%
Targetannual oper atingi ncome( 0.18*$96, 000, 000) ………………………….$17, 280,000
Targetoper atingi ncomeperuni tofPr ovalueI I( $17,280, 000÷200, 000uni ts)…..$86. 40
Thiscal cul ationi ndicat est hatAst elneedst oear nat ar getoper at
ingi ncomeof$86. 40
oneachuni tofPr ov alueI I.Themar kup( $86. 40)expr essedasaper centageoft hef ul
l
unitcostoft hepr oduct( $720)equal s12%( $86. 40÷$720) .
Donotconf uset he18% t ar getr ateofr etur noni nv estmentwi t
ht he12% mar kup
percent age.
 The18%t argetr at eofr eturnoni nv est mentexpr essesAst el’
sexpect edannual
oper atingi ncomeasaper centageofi nv estment .
 The12%mar kupexpr essesoper atingi ncomeperuni tasaper cent ageoft hef ul
l
productcostperuni t.
Astel usest het ar getr ateofr eturnoni nvest mentt ocal culatethemar kupper centage.

TRANSFERPRI
CING
In decent r
alized organizations,much oft he decision-maki ng powerr esides i nits
i
ndividualsubuni ts.Inthesecases, t hemanagementcont r
olsy stem oftenusest ransfer
pri
cest ocoor di
natetheact ionsoft hesubuni t
sandt oev al
uat etheirperformance.
At r
ansf erpriceist hepr i
ceonesubuni t(depar t
mentordi v isi
on)chargesf orapr oduct
orser vi
cesuppl i
edt oanot hersubuni toft hesameor ganization.If,f
orexampl e,acar
manuf acturerhasasepar atedi v
isiont hatmanuf acturesengi nes,thet ransferpr iceis
thepr i
cet heengi nedivisionchar geswheni ttr
ansf ersengi nest ot hecarassembl y
divi
sion.
Thet ransferpr i
cecr eatesr evenuesf orthesel li
ngsubuni t(theenginedi vi
sioni nour
exampl e)andpur chasecost sfort hebuy i
ngsubuni t( t
heassembl ydi visioni nour
exampl e),affecti
ngeachsubuni t
’soper at
ingincome.Theseoper at
ingi ncomescanbe
usedt oev aluatesubuni ts’performancesandt omot ivatet heirmanager s.Thepr oduct
orser vi
cet ransferredbet weensubuni tsofanor ganizationi scalledani ntermedi ate
product.Thispr oductmayei t
herbef urt
herwor kedonbyt her eceivi
ngsubuni t(asi nthe

5
engi neexampl e)or ,ift ransf er redf r
om pr oduct i
ont omar ket i
ng,sol dt oanex ternal
cust omer .
Ther at i
onal ef ort ransf erpr i
cesi st hatsubuni tmanager s(suchast hemanageroft he
engi nedi vision) ,whenmaki ngdeci sions,needonl yf ocusonhow t hei rdeci sionswi l
l
affectt hei rsubuni t’
sper formancewi thoutev aluat ingt heiri mpactoncompany -
wi de
perf ormance.I nt hi ssense,t ransf erpr iceseaset hesubuni tmanager s’i nfor mati
on-
processi nganddeci sion-maki ngt asks.I nawel l-
desi gnedt ransf erpr icingsy st
em,a
managerf ocusesonopt imizingsubuni tper f
or mance( theper formanceoft heengi ne
division)andi nsodoi ngopt i
mi zest heper for manceoft hecompanyasawhol e.
Fourcr iter i
at oev aluat e
Transf erpr i
cing:( 1)Tr ansf erpr icesshoul dpr omot egoalcongr uence.( 2)Theyshoul d
i
nducemanager st oexer tahi ghl ev elofef f
ort.Subuni tssel li
ngapr oductorser vice
shoul dbemot ivat edt ohol ddownt hei rcost s;subuni tsbuy i
ngt hepr oductorser vice
shoul dbemot i
vat edt oacqui reandusei nput sef ficient ly.(
3)Thet r
ansf erpr iceshoul d
helpt op managementev al
uat et he per for mance ofi ndividualsubuni t
s.( 4)I ftop
managementf avor sahi ghdegr eeofdecent rali
zat ion, transf erpr icesshoul dpr eservea
hi
ghdegr eeofsubuni taut onomyi ndeci sionmaki ng.
Calcul at ingTr ansf erPr i
ces
Ther ear et hr eebr oadcat egor iesofmet hodsf ordet ermi ni
ngt ransf erpr ices.Theyar e
asf ol l
ows:
1.Mar ketbasedt ransf erpr i
ces.Topmanagementmaychooset ouset hepr iceofa
si mi larpr oductorser vicepubl icl ylistedi n,say ,at radeassoci ati
onWebsi te.Also,
t opmanagementmaysel ect ,fort hei nternalpr ice,t heext ernalpr icet hatasubuni t
char gest oout sidecust omer s.
2. Cost -basedt ransf erpr ices.Topmanagementmaychooseat ransf erpr i
cebasedon
t hecostofpr oduci ngt hepr oducti nquest i
on.Exampl esincludev ariabl epr oduct i
on
cost , variabl eandf ixedpr oduct ioncost s,andf ull costoft hepr oduct .Ful lcostoft he
pr oducti ncl udesal lproduct ioncost spl uscost sf r
om ot herbusi nessf unct i
ons( R&D,
desi gn, mar ket ing, distr i
but i
on, andcust omerser vice) .
3.Hy br i
dt r
ansf erpr i
ces.Hy bridt ransf erpr icest akei nt oaccountbot hcostandmar ket
inf or mat ion.Top managementmay admi nistersuch pr ices,f orexampl e by
speci f yi
ng a t ransf erpr ice t hati s an av erage oft he costofpr oduci ng and
t ranspor tingt hepr oducti nter nal lyandt hemar ketpr iceforcompar abl epr oduct s.At
ot hert imes, ahy bridt ransf erpr icemayt aket hef or m wher et her ev enuer ecogni zed
byt hesel l
inguni tisdi f f
erentf rom t hecostr ecogni zedbyt hebuy i
nguni t.Themost
commonf orm ofhy bridpr icesar i
sev ianegot i
at ion—t hesubuni t
sofacompanyar e
askedt onegot iatet het ransf erpr icebet weent hem andt odeci dewhet hert obuy
andsel li
nt ernal l
yordeal wi t hext er nal par ti
es.Theev entual t
ransf erpr i
cei st hent he
out comeofabar gai ningpr ocessbet weensel li
ngandbuy ingsubuni ts.
AnI llust rationofTr ansf erPr i
ci ng

6
Hor izon Pet roleum has t wo di visions,each oper ating as a pr ofitcent er.The
transpor tat i
ondi visionpur chasescr udeoi li nMat amor os,Mexi co,andt ranspor tsi t
from Mat amor ost oHoust on,Texas.Ther efiningdi vi
sionpr ocessescr udeoi li nto
gasol i
ne.Forsi mpl icity,weassumegasol inei st heonl ysal abl epr oductt heHoust on
ref i
ner ymakesandt hati ttakest wobar relsofcr udeoi ltoy i
el donebar rel ofgasol i
ne.
Var i
abl ecost si neachdi v i
si onar ev ariablewi t
hr espectt oasi ngl ecostdr i
v er: barrelsof
cr udeoi ltranspor tedbyt het ranspor tationdi vision, andbar relsofgasol inepr oducedby
ther efini ngdi vision.Thef ixedcostperuni ti sbasedont hebudget edannual fixedcost s
andpr act i
calcapaci tyofcr udeoi lthatcanbet ranspor tedbyt het ranspor tationdi vision
andt hebudget edf ixedcost sandpr act i
cal capaci tyofgasol inet hatcanbepr oducedby
ther efiningdi vision.Hor izonPet roleum r epor tsal lcost sandr ev enuesofi tsnon- U. S.
oper ationsi nU. S.dol lar susi ngt hepr evaili
ngexchanger ate.
 Thet ranspor tationdi v i
si onhasobt ainedr i
ght st ocer tainoi lf ieldsi nt heMat amor os
area.I thasal ong- ter m cont ractt opur chasecr udeoi lpr oducedf rom t hesef i
eldsat
$72perbar rel.Thedi visiont r
anspor t
st heoi ltoHoust onandt hen“ sel ls”i ttot he
refiningdi vi
si on.Thepi pel inef rom Mat amor ost oHoust onhast hecapaci tyt ocar ry
40,000bar rel sofcr udeoi lperday .
 Ther efiningdi vi
si onhasbeenoper at i
ngatcapaci t
y( 30, 000bar r
elsofcr udeoi la
day ),usi ngoi lsuppl iedbyHor izon’ st ranspor t
at iondi vision( anav er ageof10, 000
bar relsperday )andoi lboughtf rom anot herpr oduceranddel i
v eredt ot heHoust on
refiner y( anav erageof20, 000bar relsperdayat$85perbar rel).
 Ther ef iningdi v i
si onsel lst hegasol i
nei tpr oducest oout sidepar t
iesat$190per
bar rel.
Tr ansf erpr icesf rom t het ranspor tat i
ondi visiont ot her efi
ni ngdi visi
onundereachof
thet hreemet hodsar easf ollows:
1.Mar ket -basedt ransf erpr iceof$85perbar relofcr udeoi lbasedont hecompet it
iv e
mar ketpr i
cei nHoust on.
2.Cost -basedt ransf erpr icesat ,say ,105%off ullcost ,wher ef ul lcosti st hecostoft he
cr udeoi lpur chasedi nMat amor ospl ust het ranspor tati
ondi v ision’ sownv ar iableand
fixedcost s1. 05*( $72+$1+$3)=$79. 80.
3.Hy bridt ransf erpr iceof , say , $82perbar relofcr udeoi l,
whi chi sbet weent hemar ket
basedandcost -basedt ransf erpr i
ces.
Hor izonPet roleum’ st ot aloper at i
ngi ncomef rom pur chasing,t ranspor ting,andr efining
the100bar r elsofcr udeoi landsel li
ngt he50bar relsofgasol i
nei st hesame,$1, 200,
regar dlessoft hei nt ernal transf erpr icesused.
Oper ati
ng=Rev enues-Costofcr ude -Tr anspor tat ion-Ref ini ng
Income oilpur chases Di vision Div i
sion
inMat amor os cost s costs
=( $190*50bar r
elsofgasol i
ne)-( $72*100bar relsofcr udeoi l)-( $4*100bar relsof
cr udeoi l
)-( $14*50bar relsofgasol i
ne)

7
=$9,500-$7,200-$400-$700=$1,200
Notefurt
herthatunderal
lthr
eemet hods,summingthet
wodivi
sionoper
ati
ngi
ncomes
equalsHori
zonPetrol
eum’stot
aloperati
ngincomeof$1,
200.