Kitako Technology Company (KTC) is a mobile phone manufacturer with a strategic focus of making well-priced phones that are environmentally friendly and built using the best available innovation. KTC has a wide range of mobile phones, including the Kit-Prime which uses a 100% recyclable material and a unique subscriber identity module (SIM) technology. Instead of the conventional physical SIM card system, the Kit-Prime uses an embedded subscriber identity module (eSIM). The main advantages of eSIM over conventional SIM cards are its capability to remotely connect users to multiple mobile operators’ profile and its secured encryption and transportation of users’ credentials.

The unique features of eSIM makes the Kit-Prime range of phones attractive to phone makers and consumers who want something that is built differently from the physical SIM connectivity. An important component of eSIM is the programmable water and temperature-resistant chip that is used to store user’s information. The chip enables subscribers to switch their network providers as well as connect multiple accounts easily without having to physically replace their SIM card or use dual-SIM supported phones. Production of the eSIM chip takes place in the Electronic-Tech Department (ETD) of KTC. The ETD sells the eSIM chip internally to the Phone Assembly Division (PAD) and externally to other phone makers and parts resellers. The retail price of the eSIM chip is $650. The wholesale price is $400. The price of the Kit-Prime phone ranges from $1,300 to $1,999.

The manager of ETD – John Richardson – argues that PAD ought to pay the market-based retail price for its eSIM chip. Mary Flinn, the Manager of PAD, thinks otherwise, “since KTC is operating in a competitive industry, additional costs to inputs for the Kit-Prime phones will lead to a fall in demand” she argues.

The managing director of KTC – Rachel Navidad – is trying to find a solution acceptable to all divisional managers and questions whether the concept of Transfer Pricing would make a difference here. She also wonders if the use of key targets relating to revenue and costs is the best option for evaluating the managers’ performance in line with the overall goal of KTC. After a thoughtful consideration Rachel decides to engage you as a consultant that will provide expert advice to KTC.

Required:

Prepare a report to the Managing Director of KTC that includes the following:

a) An explanation of the concept of transfer price AND its main objectives for a phone

manufacturer like KTC.

b) An explanation of why transfer prices are different from prices set in a market, including explanations of the FOUR objectives of transfer pricing.

c) A critical discussion of the TWO main rules guiding the setting of transfer prices.

d) A discussion of the likely consequences of giving authority to establish the transfer price of the conductors to each of the following:
i.) the manager of ETD;
ii.) the manager of PAD; or

iii.) the managing director of KTC?

e) An explanation of any FIVE questions in line with Ferreira and Otley’s performance management systems framework that KTC should address with respect to its performance

Rachel Navidad to take.

management system.

f) Based on your discussion in (d) and (e) recommend the appropriate actions you expect