aa ‘The following is a brief summary of what happened next 1. Gillot wrote to Ekstrom: “Lam sorry to inform you that your proposel to menutacture XL-4 in ‘Swoden is rejected. I know that you and your management have cone an ‘outstancing job of market research, engineering planning, end profit cstimation, but two other factors worked against you. First, it seems more profitable for our Belgium plant ro manufacture XL-8 and export It to Sweden, Second, executives in our Domestic Division here are conwinood that the product should be made in Belgium wnere we have the experience ‘and know-how. They are also not sure thet you can sell 400 tons a year in ‘Sweden. "Iwant you to know, however, that wo in Hoadquartors are most appreciative cf the kind of work you are doing in Sweden. This adverse decision in no way reflects a lack of confidence in you ot a failure on our part to recognise your outstanding performance as the Managing Director of one of cur-most important daughter companies.” 2. So Ekstrom decided to introduce XL-4 into Swoden and placed orders for delivery from Belgium. The transfer price, including Skr 450 shipping and duty, was Skr2150. To recover something for his prometion costs Exstiom launched XL-4 ata price of Skr 2500; a this price he cidnt sell much. So he wiote to Gachoud asking for a reduction inthe transfer price; Gachoud declined. 3. Eight months atter launch, Ekstrom reduced his selling price to Skt 2200 in an attempt to boost sales. Over the next four months sales crept upto 150 tons p.a. Original case series copyright 1969 IMEDE Lausenne Edited WCF Hartley . SIMFP 95 epv62ecosoe Ekstrom then went personally to see Gachoud and demanded a reckction in the transter price. For only 150 tons Gachoud declined again and repeated his doubts that Ekstrom would ever reach 400 tons p.a. Twolve months after launch Ekstrom (now salling 200 tons) raduced his price to Skr 1850 and showed the following table to Gift: T i \ T 1 | (Se i 1 u 1 Seitiag Price 1 | 440,000 {11.850 | 740,000 1 Variable Costs: t 1 i 1 Manufacturing (Belgiun)..; 930 | IT 930 1 Shipping (Belgium-Sweden) | so} i so Inport Buty (lveden)s--- | 400 | i490 1 ‘Total Variable coscas-|_Ip360_| 276,000 ||Tr388_1 $82,000 r T il T 1 1 il 1 Factory Margin. | 1 164,000 {1 | 188,000 1 1 i Promotional Cost: 1 | 13,000 1 | 73,000 1 Profit Contribution to | i i t Roget. Group 1 see Hi sxe 333,000 1 i—— |t = 1 1 u 1 \ * Ekstrom's actual promotional costs during the first year Were Skr 130,000 but ware budgeted for Skr 75,000 in the secend year and Skr 50,000 p.<. thereatter ‘Two months tater, sales were ruming at 270 tons p.a. Ekstrom now writes to Gillot requesting him to direct Gachoud to reduce the transfer price to ‘Skr 1550 (including shipping and duty of Skr 450) otherwise he threstens to withdraw XL-4 from the Swedish market. 2) Giilot has not yet dacided what to do with this request. As he says, “Transter pricing in this company is pretty unsystematic. Each di managament executive committee doesn't interfere. | have the same kind of authorty over transfer prices as I have over the prices we charge our independent agents. We've never thought of them as sepafate problems. I've never been in a stuation lke this, though, ‘and | want to think it through carefully before | act. ional manager is expected to price his own products, and the top Spyezscos2 *Our attitude towards transfor pricing is probably the result of the ‘way we operated in foreign markets in the beginning. We developed our export trade for many years by selling our products to independent agents around the world. We stil do a lot ot business that way. These agents estimated the prices at which they could sell the product and then negotiated with the export sales manager in Brussels for he best price they could get. *When we began setting up our own daughter companies in our bigger markets, we just continued the same practice. Of course, daughter companies ike Thorsten cannot shif to a competing ‘supplier, but they have great freedom otherwise. For exemple, they can ty to negotiate prices with us here at headquarters. This healthy competition within the company keeps us all alert. they think Beigium is 100 rigid, they can refuse to market that particular product in their home country. or, i they can justify building their own manufacturing plants, they can make the product themselves and not deal with the Belgian export department at all. b) Head office practice has resulted in selling prices that vary widely from markal to market. One agert in Norway is in fact receiving XL¢at a price excluding shipping and duty, equivalent to Skr 1173. This agent is selling to his customers at Skr 1290 equivalent plus Norwegian duty. Lambert and Gachoud hold the ‘ollowing views: ‘a stand fast on price and thus force Ekstrom to raise his price back to a level which is profitable for all of us. b) ithe does withdraw XL-4 from the Swedish market, we can find an independent agent in Sweden to handle it for us. ‘So the saga continues, and now: It'you were Ekstrom, would you withdraw XL+4 from the Swedish market tt the transfer price were not reduced? What should the transfer price be? Does it really matter what the transter Price is? It's only an intornal mattor isn't it? What is the fundamental problem which has caused Ekstrom and Gachoud tocisagree? What should Gillot do now? What should Juvet do? yoy6c8cos4 6 Looking back on the whole saga, what is now your opinion on the Roget Group rules (see AB Thorsten I question 2). What, it any, changes would you make to them? Post Script: WCFH/95/SMFP apologies for inflicting you with this case series: atter all, itis academic and couldn’ happen in BAT Ind. could it? Grv6Z8c0S