China Petroleum & Chemical Corporation (Sinopec) is an integrated producer of oil and chemicals. Sinopec’s refining division sells most of its production to the marketing and distribution division. The company’s policy is to set inter-segment transfer prices according to the market price or cost plus an appropriate margin. In early 2014, Sinopec announced that it would partially privatize the marketing and distribution division.

Answer these questions in your discussion:

1. How does the transfer price of refined products affect the profits of the marketing and distribution division?

2. China is a large country with refineries sourcing crude oil from diverse sources, including foreign countries. Would the market prices of refined products be the same in all places?

3. Suppose that Sinopec allows the marketing and distribution division to outsource its supply of refined products. How would that affect the refining division’s sales to the marketing and distribution division?